The Role Of Money

OU_160343>5

THE
ROLE OF MONEY

WHAT IT SHOULD BE,
CONTRASTED WITH WHAT IT HAS BECOME

By

FREDERICK SODDY

M.A. (Oxon) ; LL.D. (Glasgow) ; F.R.S. ; Nobel Laureate
in Chemistry, 1921 ; Author of " Science and Life " ; " Wealth,
Virtual Wealth , and Debt " ; " Money versus Man " ; etc.

LONDON

GEORGE ROUTLEDGE AND SONS, LTD.

BROADWAY HOUSE: 68-74 CARTER LANE, E.C.

J 934

PRINTED IN GREAT BRITAIN BY
STEPHEN AUSTIN AND SONS, LIMITED, HERTFORD

CONTENTS

CHAP. PAGE

I. THE PHILOSOPHIC BACKGROUND

ERGOSOPHY i

The Objective The Monetary System Obsolete
The Community Standpoint Social Importance
of Energetics Energy Theory of Wealth
Ergosophy Wealth and Calories Marxism
Obsolete Relation between Peoples and Govern-
ments Physical Interpretation of History
The Truth about " Materialism " The Physical
Origin of " Progress " The Doctrine of
Struggle Modern Wars and National Debts
The Real Struggle The Taboo on Scientific
Economics Wars and Revolutions result from
Wealth The Monetary System impedes the
Flow.

II. THE THEORY OF MONEY VIRTUAL

WEALTH . . . . * V 24
+ . *- ~ ** .

""What is Money ? Barter and Barter-Currencies
v Paper Money Bank-Credit The Private Issue
of Money Monetary Policy What gives Value
to Money ? Two Fundamental Monetary
Principles Virtual Wealth The Community's
Credit Credit money a Tax '* Backed "
Money Money a Claim to what does not Exist
The Price-Level Money from the Issuer's
Standpoint Money not now a Tangible Token
Changeover from Barter to Credit Money
The False Step Why was it False ? The
Profit^ ,,of *tfye,. Issue of Money Money In-
destructible without! Expropriation.

III. THE EVOLUTION OF MODERN MONEY . 56

The Origin of the Cheque Government Regulation
of Banking-VLending Cheque books Genuine
and Fictitious Loans Current Account

VI CONTENTS

CHAP. ^ PAGB

Deposits Why Cheque Money is preferred to
Tokens The Gold-Standard The Correct
Procedure The Credit or Trade CycleHow
the Losses are Distributed Fraudulent Monetary
Terminology The Gold Drain The Govern-
ments Connivance The Cunliffe Committee
Deflation The Abortive Return to Gold True-
blue Treason The 1928 Act What is Genuine
Money To-day ?

IV. MONEY AS IT Now Is . .86

Monetary Illusions A Distinction without a
Difference The Vested Interest in Creating
Money Open Market Operations Cash I
Banks now Create Money for Themselves to
SpeHa^The Banker as Tax-gatherer The Sprat
to catch a Mackerel Banks give no Security
Whatever The Time-element of Money The
Circulation of Money The Value of Money or
Price-level Some Monetary Factors A Grain
Currency Economizing in the Use of Money
now Fallacious Money Tokens or Book
Credit ? Should Money-lending now be
Permitted ? Physical Absurdity of Short-term
Lending Current Accounts and Time-
deposits How the Banker avoids His Own
Trap.

V. INTERNATIONAL ECONOMIC RELA-
TIONS 116

Bad Money Embroils the Nations International
Banking Money at Call and Short Notice
How the International Banker rules the World
Money is National not International Debt
Importers pay Exporters of their Own Nation
The Balance of Trader-Effect of Loans and
Repayments The Foreign Exchanges Gold-
Standard drags all Nations down to Level of
Lowest Effect of freeing Foreign Exchanges
Correct Use of Gold.

VI. PHYSICAL REQUIREMENTS OF A

MONEY SYSTEM . / . . .135

Money in the New Economics There is now no
Shortage of Wealth Motive The Existing

CONTENTS Vll

CHAP. PAGE

Wealth Consumption for Production and for
Leisure Consumable and Capital Wealth
Capital Debts not Repayable Energy Con-
siderations Productive Capital not Distribut-
able Capital under Communism and In-
dividualism All Costs of Production are
Distributed to Consumers Production for Con-
sumers Production for Producers The
Accumulation of Debts Solution of the Un-
employment Problem Cost of Increasing Pro-
duction not Repayable The Quantity of Money
cannot be Calculated The Price Index-
determines the Quantity of Money The
Wasteful Costs of Distribution The Role of
Money summarized.

VII. DEBTS AND DEBT REDEMPTION . 161

An Age of Power rather than of Machines Money
Unrepayable National Debt Capital Debts
Unrepayable " Saving " Conventional
Necessity of Constant Price index How the
Workers Would Benefit Regulation of Money
by Price index A -simple Price index The
Statistical Bureau A Reconstituted Mint
Criticism of Proposals to Nationalize Banking
Prevention Better than Cure Interest on
Debts If Increment looking Forward, then
Decrement looking Backward Paterson's Interest
Law Discounting the Principal Gesell's Ideas of
Making Money Itself Depreciate Objections
The Possibility of Arbitrarily Lowering Interest
Rates The Probable Effect in Increasing Capital
Indebtedness Straightforward Debt Redemp-
tion by Taxation.

VIII. THE PRACTICAL SITUATION . .189

Is the New or the Old Economics Upside-down ?
Abundance First, Apportionment Second The
Attitude of the Public towards Costs Govern-
ment Interference in Economics not Helpful
A Progressive Evolution of Industry Monetary
Reform First The Existing System on the
Horns of a Dilemma The Economic Necessity of
Frontiers Free Exchanges mean Free Trade
Compromise hardly Feasible.

Vlll CONTENTS

CHAP. PAGE

IX. HONESTY is THE BEST MONETARY 204
POLICY .....

The Signs of a New Truth Monetary Reform
Begins at Home The U.S. A. Plan Synopsis of
the Principles of Reform Free the Exchanges
The Real Universal Dictatorship Reculer
pour mieux sauter Which is Lawful, to Create
Money or Wealth? The British Way The
Real Antagonist Envoi.

BIBLIOGRAPHY . . . .221

PREFACE

This book attempts to clear up the mystery of
money in its social aspect. With the monetary
system of the whole world in chaos, this mystery
has never been so carefully fostered as it is to-day.
And this is all the more curious inasmuch as
there is not the slightest reason for this mystery.
This book will show what money now is, what it
does, and what it should do. From this will
emerge the recognition of what has always been
the true role of money. The standpoint from
which most books on modern money are written
has been reversed. In this book the subject is not
treated from the point of view of the bankers
as those are called who create by far the greater
proportion of money but from that of the
PUBLIC, who at present have to give up valuable
goods and services to the bankers in return for
the money that they have so cleverly created
and create. This, surely, is what the public
really wants to know about money.

It was recognized in Athens and Sparta ten
centuries before the birth of Christ that one
of the most vital prerogatives of the State was
the sole right to issue money. How curious that
the unique quality of this prerogative is only now
being re-discovered. The" money-power " which

ix

X PREFACE

has been able to overshadow ostensibly responsible
government, is not the power of the merely ultra-
rich, but is nothing more nor less than a new
technique designed to create and destroy money
by adding and withdrawing figures in bank ledgers,
without the slightest concern for the interests of
the community or the real rdle that money ought
to perform therein.

The more profound students of money and,
more recently, a very few historians have realized
the enormous significance of this money power
or technique, and its key position in shaping the
course of world events through the ages. In this
book the mode of approach and the philosophy
of money is expounded in the light of a group of
new doctrines, to which the name ergosophy is
collectively given, which regard economics,
sociology, and history with the eye of the engineer
rather than with that of the humanist. It is con-
cerned less with the details of particular schemes
of monetary reform that have been advocated
than with the general principles to which, in the
author's opinion, every monetary system must at
long last conform, if it is to fulfil its proper role
as the distributive mechanism of society. To allow
it to become a source of revenue to private issuers
is to create, first, a secret and illicit arm of the
government and, last, a rival power strong enough
ultimately to overthrow all other forms of
government.

THE ROLE OF MONEY

CHAPTER I

THE PHILOSOPHICAL BACKGROUND.
ERGOSOPHY

HPHE Objective. It is now some sixteen years
* since the close of the great event that dis-
played, for all to see, man and his would-be rulers
and mentors powerless in the grip of the forces that
their technologists had safely chained but that
war had let loose. There is a distinct under-
standing in the general consciousness '.that this
generation is witnessing the veritable birth-throes
of a new era dictated by the progress of physical
science, rather than owing anything to those
who have hitherto been most vocal in debate or
most prominent in the attempted direction of
affairs. There is a growing exasperation that an
age so splendid and full of the noblest promise
of generous life should be in such ill-informed
and incompetent hands.

The Monetary System Obsolete. Everywhere
now there is the dawning consciousness among
thoughtful minds that this age contains elements
not understood or contained within the working
rules of the older systems of government,
economics, sociology, or even religion, and that it

2 THE ROLE OF MONEY

is due to new principles that have to be introduced
into the base and can in no wise be met by a
change in the superstructure of society. Even more
remarkable, almost incredibly so to those who
have been hitherto lost voices crying in the
wilderness, is the swiftly growing volume of
agreement that it is the obsolete and dangerous
monetary system that, primarily, is at fault. It is
this entirely empirical and defeatist body of
rules and conventions, that has grown up along
with the scientific expansion of the means of life,
that is responsible not only for the present
paralysis but also for the Great War itself. All
are agreed that here at least change is inevitable,
the only doubt indeed now being whether any
part of the system, which through a lack of imagi-
nation as to what might have been is still apt
to be described as having " worked well in the
past ", can survive into the future.

The present book as dealing with the role
of money cannot fail therefore to be of funda-
mental importance, if it succeeds at all in filling
its place in the New World Series, which is nothing
less than to be a guide and a lamp to those whom
fate shall select to be the new leaders of the great,
though not of necessity violent, changes that
are close upon us. When the War forced
upon everybody's attention the grave dangers
surrounding a scientific civilization through
the very immensity of the destructive powers
that science has put into the hands of nations

PHILOSOPHICAL BACKGROUND ERGOSOPHY 3

still thinking only in terms of brute strength,
the writer undertook an original examination
into the real physical foundations of the con-
ventions and half-truths that pass for economics,
and particularly into those underlying the
mechanism of distribution, which is, in a
monetary civilization, the money system. His
most significant conclusion, from which subse-
quent events have given him no reason to recede,
indeed it is now a truism was that nothing
useful can be done unless and until a scientific
money system takes the place of the one now
always breaking down.

The corollary, however, is never likely to be
popular with our professional politicians at least.
It was that, if such a thing were done, little else
in the way of arbitrary interference with and
government control over the essential activities
of men in the pursuit of their livelihood would
be required. Indeed, just as now not one in a
thousand understands why the existing money
system has such power to hurt him, so, if it were
corrected as here outlined, not one in a thousand
would need to know or, indeed, would know,
except by the consequences, either that it had
been rectified or how it had been rectified. For
the aim of the present book is to show how the
money system may be reduced to one of exactly
the same character as that of our standard weights
and measures.

The Community Standpoint. It will be

4 THE ROLE OF MONEY

necessary to go more fully into the combination
of circumstances which make these matters at
once so vital to the social and economic health of
the community and so completely outside the ways
of thought that appertain to the individual and
guide him in his own private affairs. Much of the
difficulty is of course the deliberate use hitherto
of common terms in senses entirely novel and
often the opposite of those normally meant, as
for example cash and credit. Much also is due
to misconception as to what undoubtedly con-
stitutes wealth to an individual, when not the
individual but the community is in question.
Because of this, the technical study of money
calls in a peculiar way for powers of generalization,
and often, indeed, the complete inversion of ideas
as they appertain to the individual. These
factors have unfortunately been completely absent
not only from so-called monetary science but
to an equal and even more important extent from
the fundamental systems of orthodox economics
to which monetary science belongs.

Now, born of the troubled times in which
we live, there has been growing up from a number
of independent and at first sight quite unconnected
roots a group of doctrines which may be broadly
described as the application of the principles
of the sciences of the material world, physics
and chemistry, to economics and sociology.
They have a common feature in that they are all
due to the original thought of scientific men

PHILOSOPHICAL BACKGROUND ERGOSOPHY 5

mainly engineers and physical scientists more
interested in and accustomed to think in terms of
physical realities than in those of social or legal con-
ventions, and concerned hardly at all with the
problems and controversies of individual or
class economics, but with the significance of
broad general and completely inescapable
principles, in particular the principles of
energetics, in regard to welfare of whole communi-
ties as affected by the production and distribution
of wealth.

Social Importance of Energetics. In the
author's opinion, at least, this new development
promises to be of far more ultimate and permanent
importance to the science of human welfare
than the earlier incursion of biology in the last
century which led to the doctrine of evolution.
This is because it imposes a rigid framework
of the fundamental physical laws, applying equally
to men as to machines, in which there is really
nothing controversial at all. The stock criticism
of such a mode of approach into sociological
questions would have been that men are not
machines, and that in economics, as in its
subdivision, money, psychological factors and
considerations are at least of equal importance to,
if indeed they are not of greater importance than,
the purely physical factors.

But that argument, unless it frankly postulates
a belief in physical miracles in the power of
the human mind to make, if it so will, 2+2=5

6 THE ROLE OF MONEY

whatever it may once have been, is now largely
out of date through the extension of the exact
sciences into these fields. There is not, never
has been, and perhaps never will be any sort of
equality at all in importance between the physical
and psychological. In the sphere of distribution,
for example, or of money as the distributory
mechanism, all that psychology can do and
the same is equally true of " banking " as it has
become is to rob Peter to pay Paul.

Energy Theory of Wealth. One of the main
contributions of these doctrines is a consistent
energy theory of wealth and the sharp distinction
that results between wealth and the ownership
of a debt. This reveals much that is incontro-
vertible regarding the threatened collapse of the
modern scientific civilization, to give it its proper
name, though it is usually miscalled the
capitalistic civilization. True, " Capital," in its
proper physical sense, is its most distinctive
superficial feature. But in that sense Capital is
the unconsumable product of the irrevocable
consumption or expenditure of wealth necessary
to prepare for and make possible the new
methods of production. Owing to modern methods
of power production, much more of it is
necessary than with the old methods. Moreover,
it may be ^changeable for fresh wealth, but it
is not changeable into it. From the community's
standpoint capital appears as debt rather than
wealth.

PHILOSOPHICAL BACKGROUND ERGOSOPHY 7

Orthodox economics has never yet been any-
thing but the class economics of the owners of
debts. If its writers ever attempted any wider
social applications, they made themselves simply
ridiculous, as when one solemnly looked forward
to the millennium arriving through the accumula-
tion of so much capital that everyone would be
well off and comfortable, presumably by living
on the interest of their mutual indebtednesses.
Whilst in the sphere of international trade, till
long after the War, the dictum that a continued
favourable balance of trade w r as essential for
the existence of the strong nations implied the
continuation of unfavourable balances for the
weak. It was stated that this country was
threatened with disaster unless it contrived to
maintain the previous rate of foreign investments
returning abroad all that it received in the way
of interest and sinking funds in respect of past
investments, and if possible more than this.
These are good illustrations of the debt-view
of wealth and the substitution of social and legal
conventions for physical reality.

Ergosophy. It is convenient to give a name
to the group of interconnected but more or less
independent doctrines comprised under such
terms as Cartesian, Physical or New Economics,
Social Energetics, the Age of Plenty, and Techno-
cracy, including the implications of these doctrines,
in regard to the problems of distribution and the
new philosophy of money, with which this book

8 THE ROLE OF MONEY

is more particularly concerned. A new word
Ergosophy will be employed for this purpose.
It means the wisdom of work, energy, or power,
in the purely physical sense. Mental or intellectual
activities, to which these three terms are often
loosely applied, are better referred to, rather, as
effort, diligence, or attention.

There are many reasons that render such a
new word or term desirable. So far there has
been no real social philosophy arising wholly
out of the universally obeyed laws of the physical
world. On the other hand, from the remotest
times, technology has been too apt to be con-
sidered merely a sort of slave or menial servant
to verbose, pretentious, and impressionistic
humane philosophies and religions. Indeed it
would hardly be a caricature of civilization, as
it has evolved up to now, to describe it as having
been attempting to compound for the injustice
of ascribing unto God the things that are of
Science by rendering unto Caesar the things that
are of God. Technocracy, in one at least of its
sources of inspiration, the suggestion of Thorstein
Veblen for the establishment of a Soviet of
technicians to take over the control of the world,
is probably one of the first collective dawnings
of this malversation. So long as we have simple
folk displaying a pathetic acquiescence in the
piety that renders thanks for all the good things
of life and ascribes them to the bounty of Provi-
dence, along with anything but simple folk who

PHILOSOPHICAL BACKGROUND ERGOSOPHY 9

totally disbelieve anything of the kind but
nevertheless do still believe implicitly in practising
much more forceful methods of obtaining them,
so long will civilization be a happy hunting
ground for the predatory and acquisitive and a
wilderness for the original and creative. The new
philosophy, by claiming for mechanical science its
rightful position as an equal in the trinity of
wisdom, should make it easier to render unto
Caesar the things that are of Caesar and to God
the things that are of God.

Wealth and Calories. In the first place
ergosophy rehabilitates with a precise meaning
that old-fashioned and indispensable word Wealth,
which the orthodox economist, knowing even
less of the alleged subject-matter of his studies
than the original founders of the subject, the
French Physiocrats, took too much for granted.
Originating, to him, ultimately somehow through
divine agency, he came to regard the acquisition
of wealth as tantamount to its creation. He
became obsessed with commerce and mercantile
exchange to the neglect of the technical principles
underlying all new production of wealth. To this
day we are in the grip of a mercantile system that
fritters away in distribution most of the advantage
gained in lightening the labour of producing
wealth. Involved in a mass of obvious incon-
sistencies, he seemed to resent the use of the
term wealth at all by those unlearned in his
sophistications. Even the orthodox are to-day

10 THE ROLE OF MONEY

exceedingly sparing in the use of the word. The
discussion that has lately been greatly in evidence
in the papers as to the income necessary to
purchase, among other things, sufficient food
to support a family in health and work possesses
a significance that may perhaps have been missed.
The whole question centred round the number of
calories of energy contained in the food itself,
this to be proved, if necessary, by burning it in
a calorimeter. This is economics, even if it is
not yet recognized as such.

Marxism Obsolete. It ought never to be
forgotten that Victorian economics was essentially
class economics, in which only gradually and
tardily the actual producers of wealth as distinct
from employers and property owners were
considered at all. But we find things worse and
not better among the accepted doctrines of left-
wing and revolutionary movements. With a
clearer recognition of the social implications of
energy our political controversies appear mainly
as due to economic confusions. In an age when
men are more and more being displaced from
their function as physical labourers by purely
inanimate sources of power, and are in danger
of being largely by-passed out of the cycle of
production and distribution by automatic
mechanisms, it would be incredible, if it were
not true, that so large a part of the world should
be misrepresented as dominated by the doctrines
of Karl Marx as to wealth originating in human

PHILOSOPHICAL BACKGROUND ERGOSOPHY 1 1

labour. Every artisan must know that this is
not now true. The views of Marx on money
were even more out of date, relatively to his age,
than his views on wealth, and it was significant
in the evidence before the Macmillan Committee
that Marxists seem to have been the last to
abandon their primitive belief in gold as a currency
medium and in the gold standard.

Relations between Peoples and Governments.
If, as appears to be happening, these obsolete
ideas and the doctrinaires who exploit them are
rapidly losing their hold on the public, and if an
increasing body of people of all shades of political
opinion are wakening to the more fundamental
revolutions rendered inescapable by the progress
of science, it is possible to anticipate for this
and other countries not yet overtaken by revolu-
tion a very different and more reasonable, if
more prosaic, course of events. For it is no
progress, having absolved the Deity from the
function of universal provider, to set up the
Government in His place. Veblen was much
nearer the reality in substituting the technologist.
In the economic affairs of the nation, at least, it
would seem no bad thing if the ordinary practical
rules of business were followed, success and
honesty being encouraged by promotion, and
incompetence and corruption entailing dismissal
much as with any other paid officials.

Physical Interpretation of History. Nor does
history seem able to escape from much the same

12 THE ROLE OF MONEY

charge as economics. If, in other revolutions,
we study not the actions and loudly proclaimed
motives of the contending parties but rather
the permanent and abiding fruits of the struggle,
there appears little if any resemblance. Historians
seem open to the charge of recording rather what
ought to have been happening according to their
one-sided philosophic preconceptions, than what
really happened. Actually, the successive political
factions appear to have gone on effectually
cancelling each other out until, by a process of
elimination, the new factors in the world which
permitted and, indeed, enforced a more satisfying
and intelligent mode of living were given freer
play. Then, and then only, the ferment subsided.
This, at least, is the interpretation of history
by Sydney A. Reeve, an American engineer who
has for thirty years been devoting himself to the
study of the great historic wars and revolutions
of the past, from the standpoint of Social
Energetics. His conclusion that these terrible
and devastating explosions could have been
avoided, and can in the future be prevented, is,
obviously, of prime importance in the present
state of the world. Human aspirations towards
progress may be taken for granted. Even in
total eclipse they are not dead, but only latent.
But whether they can achieve realization rather
than mere passive or active revolt, doomed in
advance to futility, is in the end a question of
the physical resources rather than the psychical

PHILOSOPHICAL BACKGROUND ERGOSOPHY 13

attitudes of men. Without an abundance, all
the more essential because of the destruction
these outbursts entail, the most valiant and heroic
strivings are vain.

The Truth about " Materialism ".This may
sound like sordid and unrelieved materialism,
and may have an ominous ring in the ears of
many. Yet nothing but ignorance or worse could
make it appear so. It is better to listen to those
who have made the desert blossom as the rose
rather than to those who have made fair fields a
slime of mud and blood ; to those who have fetched
from the stars the cornucopia that suckled Jupiter
instead of those who empty it in the rivers and
the fire for fear of glut ; to those who would
let light and air into warrens and fight social
disease with food and warmth rather than drugs
and doles ; who wait to loose into life the mount-
ing tide of wealth rather than watch it burst
its dams and leap again to the work of destruction
and death. Rather is it not terrible that men who
can do all these things are reckoned the mere
hirelings of miscalled humanists and idealists,
and are not supposed to be concerned whether
they are hired to create or destroy-! Even the
mules of the United States, we read, when the
boll-weevils, specially imported for the purpose,
failed to destroy the cotton crop to prevent
" overproduction ", refused to tread back into
the earth the growing plants. Whereas men,
with resources at their disposal ample to build

14 THE ROLE OF MONEY

up a civilization of a magnificence and liberality
the world has never known, are now at their wit's
end to invent new forms of destruction and waste
lest this new civilization should displace the old.

The Physical Origin of " Progress ". Some may
see in ergosophy nothing but economic determin-
ism pushed to extremes. True, calories are
king all right in the sense that nothing whatever
can happen without sufficient expenditure of
them, a condition upon which humanists usually
find it convenient not to dwell. But this sort
of determinism the new doctrine deduces to laws
which do not arise from life at all, though all life
obeys them. That this is not or at least was
not merely trite and self-evident is clear from
the views of Marx, to whom the doctrine of
economic determinism is so largely ascribed,
as to the origin of wealth. If he had left out from
his definition of wealth the word " human ",
and had said that wealth had originated in labour,
in the sense the physicist uses the word for work
or energy, he would have anticipated modern
views. Instead, he referred to the original founder
of this, perhaps the greatest of all scientific
generalizations, as " an American humbug, the
baronized Yankee, Benjamin Thompson, alias
Count Rumford ".

But though now this be little more than a
truism, there is something much more positive
in these doctrines than the mere barring out or
subordination of human and religious factors

PHILOSOPHICAL BACKGROUND ERGOSOPIIY 15

from the ultimate arbitrament of the fate of
communities. So far as the individual goes there
appears perfect free-will to utilize or not the
opportunities afforded by invention and discovery
in order to lighten the labour and multiply the
rewards of livelihood. But this free-will by no
means extends to his ability permanently to
prevent others from so doing. Reeve's theory
of wars and revolutions is that they arise from
just this attempt, which is always ultimately
unsuccessful and disastrous. Whatever you may
choose to label the new view, it implies clearly
that human progress is predestined from below,
even if not initiated from above. At the best
men may be led on to higher modes of life, but
at the worst they are impelled from the rear.
But it leaves, as outside its province, the actual
form and nature of human progress to the other
members of the trinity, the biological and psychical
content of the age that may be in existence at
the time.

The Doctrine of Struggle. Unpleasant and
shattering to many cherished illusions as this
may seem, it is, nevertheless, the key that best
fits our age, and none know it better than those
who have tried to spread the new evangel. As an
Australian writer recently well put it there
are many who cling to (for others not themselves)
poverty, insecurity, hard work, scanty living,
wars, starvation, and disease, as blessings in
disguise, necessary to goad and subdue this lazy

1 6 THE ROLE OF MONEY

and unruly animal, man, and to protect him from
softness and decadence. This is the doctrine of
existence for struggle, rather than of struggle
for existence, and it is probably the oldest doctrine
in the world. It stinks of the East not the West.
If it is regarded as " biological necessity ", the
physical imperative is even more categorical.
For in struggle man can not now exist he can
only destroy himself and be destroyed. Surely
it is rather crude biology, seeing that from its
earliest inception life has been doing little else
than dodge physical imperatives, to suppose that
man should at this epoch of his evolution suddenly
reverse his instincts and, of necessity, knock out
his brains against them. In truth, these ideas
have, as the Australian writer was careful to
point out, only a vicarious application, and the
biological necessity of death for the individual
is still the greatest insurance for the survival of
the species. The problem is, rather, educational
for the race to learn effectively to protect itself
against those who, learned mainly in the history
of the bygone bow and arrow ages, would use the
titanic weapons of science for race annihilation.

Men, it is true, in those ages may have been
goaded on by starvation to successful robbery
and theft of their neighbours, but, in this power-
age, progress has been due to the conquest of
nature and the by-passing of men. Whatever
may be the ultimate genie effect of the Great
War, it is generally admitted that the French

PHILOSOPHICAL BACKGROUND ERGOSOPHY 17

Revolution and the Napoleonic Wars have percep-
tibly reduced the average physique of the French
nation, and that now wars, since superior courage
and valour are much more likely to lead to swift
personal annihilation than ultimate survival, are
definitely and necessarily dysgenic. While on the
positive side, where courage and stamina are
essential to survival, in exploration of land, sea,
and sky, and in trying out and taming still
imperfectly understood new processes and
appliances to the use of men, science has provided
and is providing both opportunities and unavoid-
able necessities for facing and overcoming dangers
that would have blenched the cheek of the
legendary heroes of olden time. The fault, if
any, is rather with our poets for not suitably
immortalizing such achievements, but in that
field no one doubts the immense superiority of
the ancients over us, who in so many other respects
have very little to learn from them.

Modern Wars and National Debts. In point
of fact, again, are wars now merely for sustenance ?
Are they not waged to secure markets wherein
to dispose of the surplus wealth arising from
scientific production operating along with the
old practical law of wages ? (By " practical law
of wages " is meant the system that ensures
to the worker just sufficient to maintain him in
a mental and physical condition to allow of his
efficient conduct of his trade, craft, or avocation.
This is, of course, a direct inheritance of the age

1 8 THE ROLE OF MONEY

of scarcity.) To put it quite bluntly, the purpose
of wars is to compel weaker nations to take this
surplus off the hands of the stronger, running up
debts, if need be, in order to pay for it. Then,
the threat of further war is necessary to ensure
that the debts and the interest on them shall
not be repudiated.

The Real Struggles. The struggle for existence
is now revealed as fundamentally a struggle for
physical energy, and the conquest of nature has
made available supplies vastly exceeding what
can be extracted from the unwilling bodies of
draught cattle and slaves. It is not the struggle
but the energy that is essential to human life.
The doctrine of existence for struggle, on the
other hand, is the oldest religion in the world.

It has never been anything but a religion of
the ambitious, dominating, and unscrupulous,
with either a race or a caste arrogation of superiority
over the races without or the herd within, an
assumption of licence to act treacherously and
injuriously towards aliens and those it deems
of inferior breed and to confine its standards
of honour and decency to those of its own blood
or order. It is a code that Christianity has actively
and passively resisted for two thousand years.
That fact is not unimportant. For between the
progress that has culminated in ergosophy and
the Christian religion there is an intimate connec-
tion. Indeed the former is in origin wholly the
product of the Christian nations of the West.

PHILOSOPHICAL BACKGROUND ERGOSOPHY 19

The Taboo on Scientific Economics. After the
War, a cry went up for scientific men to co-
operate with the financial, industrial, and political
authorities in solving the social evils that brought
on the War and which have since made Peace
nothing but a misnomer. But the strange and
unconventional conclusions of the few who had
brought to social problems the same searching
and original thought that they were accustomed
to apply in their own inquiries, frightened, not
the public, but those whose interest in such
problems is to keep them reconciled with things
as they are. Those who persisted in shedding
light on social evils and anomalies were deemed
impious, and the conclusions tabooed. But it is
the merest folly to suppose that in these days
any sweeping generalization that clarifies existing
great issues can be suppressed. Now that there
are signs that the Age of Plenty school of monetary
reformers is winning, and that the conspiracy
of silence on the part of the " respectable "
Press has failed, we may assess the cost. Fifteen
years of golden opportunity have been wasted,
the time having been devoted instead to the
exacerbation of the disease. Policies, which
now everyone knows were the exact opposite of
those required by the facts, such as economizing, or
producing more and consuming less, have worked
themselves out to their inevitable results. The
public is expected to believe that the misfortunes
that beset us are acts of God and that, though

2O THE ROLE OF MONEY

we have the science and the necessary equipment
and organization to produce wealth in abundance,
it is beyond the wit of man to learn how to
distribute it. The problem, it is true, is new, and
the approach to it obscured, often intentionally,
by a mass of half-truths and once-truths. But
its solution has not been rendered any nearer
or clearer by the puerile effort of the post-War
era to suppress free public discussion of the new
doctrines, an issue that was fought out and won
in physical science in the time of Galileo.

Wars and Revolutions Result from Wealth. The
reader will no doubt be able to supply for himself
many striking confirmations of the theory that
wars and revolution result not from poverty and
misery but from the growth of wealth and the
futile attempt to resist its distribution. But two
striking ones that occur to the author may be here
cited. The first is as to the immediate and
incidental causes that precipitated the first
Kerensky Revolution in Russia. We were told
by intelligent and unbiassed Russians at the time
that it was neither starvation and poverty nor
the horrors of defeat in war but two exhibitions
of official incompetence so gross as to outrage
the deepest feelings of Russia. The one was the
mass conscription of the peasants long before there
were arms or barracks for a small fraction of them,
whereby a large proportion died from the pesti-
lential conditions engendered. Even from a purely
military standpoint they would have been far

PHILOSOPHICAL BACKGROUND ERGOSOPHY 21

better left at work on their fields. The other was
the loss of practically the whole of one season's
crop of one of the chief grain districts of South
Russia during transference from barges to the
rail-head through its being dumped at a spot
universally known as being liable to sudden
autumn floods.

The second illustration is of more than
incidental purport. Olive Schreiner in the
introduction to her book Woman and Labour
tells how she came to regard it as almost axiomatic
that " the women of no race or class will ever
revolt or attempt to bring about a revolutionary
adjustment of their relation to their society,
however intense their suffering and however
clear their perception of it, while the welfare
and persistence of their society requires their
submission ". They do so, in brief, when the
changed conditions make acquiescence no longer
necessary or desirable.

It is not suffering but unnecessary suffering
and misery that is the goad of human progress.
Precedent to the latter is the material progress
in the inventions and arts that give men power
over their environment, and happy indeed is
the age in which precedent also, and keeping pace
with the expansion of wealth, is progress in the
moral and spiritual sphere. For then we get not
revolution but renaissance. So in our day it is
not the agitator fomenting class-hatred who can
start, nor the airmen raining down bombs that

22 THE ROLE OF MONEY

can stop, a revolution. But empty milk into the
Potomac ; import pests to destroy the cotton
crop ; burn wheat and coffee as fuel ; restrict
the production of rubber ; set up tariff-barriers ;
permit trusts, federations, cartels, and lock-outs ;
allow trade unions to develop ca'canny methods
to reduce output ; maintain in misery, insecurity,
and idleness masses of unemployed who are not
allowed to better their lot by making the very
things of which they stand in need ; and revolu-
tion in some form is not probable, but certain.
The ideas that govern men are outraged. Instead
of a few striking illustrations of incompetence or
worse they begin to see universal chaos instead
of order. Their institutions, so far from pro-
tecting them in their peaceful avocations on
which they rely for their livelihood, appear
leagued together to keep them in traditional
and unnecessary servitude and dependence. The
army begins to realize that it is officered by the
enemy.

The Monetary System Impedes the Flow.
Nor will any means avail to terminate or defeat
such a revolution, whether it is sudden or long-
drawn-out, violent or chronic, unless and until
the barriers that oppose the free and full
distribution of wealth from the producer to the
ultimate user and consumer are broken down and
the flow of wealth again fulfils the purpose for
which men have striven to create it. Since, in
all monetary civilizations, it is money that alone

PHILOSOPHICAL BACKGROUND ERGOSOPHY 23

can effect the exchange of wealth and the con-
tinuous flow of goods and services throughout the
nation, money has become the life-blood of
the community, and for each individual a veritable
licence to live at all. The monetary system is the
distributory mechanism, and this reading of
history therefore supports up to the hilt the con-
clusions of those who have made a special study
of what our monetary system has become. It is
the primary and infinitely most important source
of all our present social and international unrest
and for the failure, hitherto, of democracy.

A very slight knowledge of our actual existing
monetary system makes it abundantly clear that,
without democracy knowing or allowing it, and
without the matter ever being before the electorate
even as a secondary or minor political issue, the
power of uttering money has been taken out of
national hands and usurped as a perquisite by
the moneylender. Practically every genuine
monetary reformer is unanimous that the only
hope of safety and peace lies in the nation
instantly resuming its prerogative over the issue
of all forms of money, which, legally, it has never
surrendered at all.

CHAPTER II

THE THEORY OF MONEY. VIRTUAL
WEALTH

JI7HAT is Money ? Let us commence our
W study of the role of money by a compre-
hensive definition of what modern money is.

Money now is the NOTHING you get for SOMETHING
before you can get ANYTHING.

Our task is to understand all that this implies.
The definition is, of course, an economic one
referring to ordinary transactions such as earning,
buying, and selling among ordinary folk generous
uncles and other voluntary benefactors not being
under contemplation and the nothing, something,
and anything of the definition refer to things of
real value in themselves, usually termed goods and
services, or simply wealth, unless hair-splitting
or purely technical distinctions turning on the
precise definition of wealth are involved. More-
over, it refers to ordinary people, in the sense of
those who neither have the opportunity nor the
power of uttering money themselves.

As a matter of fact, this definition not only
answers comprehensively what money now is
but answers perfectly satisfactorily all that money
has always been, whether it has been coin or

24

THE THEORY OF MONEY VIRTUAL WEALTH 25

paper or any other form. From the point of view
of the owner or possessor of it, money is the credit
he has established in his favour with the com-
munity in which it passes current or is " legal
tender ", by having given up in the past valuable
goods and services for nothing, so as to obtain
at his own convenience, in the future, equivalent
value in turn for nothing. It is merely an ingenious
device to secure payment in advance, and in
a monetary civilization the owners of money are
those who have paid in advance for definite
market values of buyable goods and services,
without as yet having received them.

There is nothing mysterious about all this.
What has been termed " the moral mystery of
credit ", meaning credit-money, might just as
well be termed the immoral mystery of debt.
For there is no credit without debt any more than
there is height without depth, East without
West, or heat without cold. The two are related,
and although it takes only one to own wealth
it takes two to own a debt, because for every
oVraer there is an ower. Money, of course, is an
entirely peculiar form of the credit-debt relation,
if only because whereas all other forms are entirely
optional, the creditor at any rate being a free
agent to enter into this relation or not, money is
a credit-debt relation from which none can
effectually escape.

Let us right from the start get the signs right.
The owner of money is the creditor and the issuer

26 THE ROLE OF MONEY

of it is the debtor, for the owner of money gives
up goods and services to the issuer. In an honest
money system the issuer of money who gets
for nothing goods and services would do so on
trust for the benefit of the community. In
a fraudulent money system he does so for the
benefit of himself. It makes no difference whether
he passes off the money and puts it into circulation
himself or lends it at interest for others to pass off
for him. In every case what he so gets to spend or
lend is given up by someone else. Ex nihilo nihil
fit. Nothing comes from nothing, or, in modern
phraseology, matter and energy are conserved.

Barter and Barter-Currencies. The invention
of money marks a distinct step upwards in civiliza-
tion. In barter the owner of one sort of property
gives it up to another in exchange for another
sort of equivalent worth. Money was able to
replace barter not because it enabled people to
obtain other peoples' property without giving
anything up, but because they had in a former
and independent transaction already given it up.
All the shades of distinction which money in the
course of its evolution has passed through, from
barter to pure credit (or debt), concern not the
something initially given up for it, which is the
one essential to all its forms. They concern
merely what is received in exchange for it. This
may vary from the full value in the form of a gold
coin to an intrinsically worthless paper receipt,
and nowadays not even that. For a variety of

THE THEORY OF MONEY VIRTUAL WEALTH 27

alleged reasons, such as the necessity to make
money circulate freely, which we need not now
take very seriously, it has been held to be
necessary, at least in certain stages of the evolution
of money, to give back to the giver-up of the some-
thing the full equivalent value in gold or other
precious metal. If this equivalent were in the form
of a certain weight of gold dust, or for that matter
any other equally convenient exchangeable
merchandise, we have merely a case of barter
pure and simple, save only for the distinction
that, in all probability, the recipient of the metal
usually had no use for it himself and accepted
it merely as a recognized temporary or inter-
mediate form of payment. But when the practice
of coining money arose, and coins were issued of
definite weight and fineness stamped with some
design, such as the king's head, indicative of
the authority under which they were legalized
as money, not only was a great step forward
taken, as, for example, in convenience of reckoning
without requiring the use of scales, but quite
definitely the material of which the coin was made
was thereby rendered useless to the owner, so
long as the coin was not melted down. Within
this limitation, that is so long as the coin remains
intact, this type of money no less than modern
credit or debt money, involved the giving up of
something really for nothing, unless a miser's
pleasure in gloating over his hoard be considered
an economic value. Also it was quite customary

28 THE ROLE OF MONEY

to make it as treasonable an offence to deface
the ruler's effigy or otherwise interfere with the
intactness of a coin as to utter a counterfeit
imitation. Though this may have been intended
to prevent clipping, sweating, and the like, it
gave the force of law to what is here taken to be
the common essential criterion of all money, the
voluntary forgoing of something of use or value
to the owner without any equivalent return.

Paper Money. In the case of a paper note,
it is still exactly what it was when it originated,
a printed receipt for something given up for
nothing. In the case of the original British bank-
notes it was at once the receipt of the bank issuing
it for the equivalent of gold, voluntarily given up
by the owner on loan or for safe keeping, and its
promise to repay it on demand. Hence the origin
of the legend Promise to Pay on our present notes.
In their use as money the gold coin and paper
note are on a par, the only difference being that
the latter has no other possible function, whereas
the former by being destroyed as money can
revert to effective use as a commodity. We are
here approaching two different considerations
which are often confused, one, what gives money
a definite exchange value, and the other, how that
exchange value may be kept from changing, and
how the owner may be safeguarded from loss
should it be debased in value.

A gold or silver currency of full value is
protected from being debased in value because

THE THEORY OF MONEY VIRTUAL WEALTH 29

it can be melted down, whether legally or not,
and the bullion bartered for value equivalent to
that given up for the money in the first place.
Whereas any " unbacked " paper money is
essentially a receipt merely or I.O.U. and, if it
is debased in exchange value, the owner has no
redress. It has been habitual for the professional
money interests persistently to denigrate paper
money, to keep alive the memory of every misuse
of the printing press (which after all does give
a tangible receipt to the owner for what he has
given up), and to preach the virtues of gold
whilst practising themselves an alchemy that did
not even require the printing press. But to an
unbiassed judge nothing could possibly be as
bad as the system which grew up and flourished
after it became physically impossible to increase
the supply of gold sufficiently rapidly to keep pace
with the expansion of industry, so that a substitute
for it as money had to be found.

" Bank-Credit" The ruinous continuous fall
in price-level, so familiar to-day, is derived in the
normal way from the checks imposed on the
natural expansion of currency, required to keep
pace with the increase of wealth in an era of
expanding prosperity. The semblance of gold
was preserved, but the system was really a gilded
fraud. There grew out of a miserable " backing "
of gold (at first with, but ultimately without, the
aid of any paper, or the issue of any receipt at all
to the owner for what he had given up) a vast

30 THE ROLE OF MONEY

superstructure of physically non-existing money
created by " bank-credit ". We may postpone
the nearer consideration of the technique till
later. If printed receipts to the owners had been
issued, the issue would have put into the shade
the worst pre-War historical examples of the abuse
of the printing press in times of political unrest
and difficulty. It is not the issue of proper receipts
that ought to be attacked, but the getting for
nothing by the issue of money of more than the
public are able to give up for it. If printing
receipts, instead of giving gold for what the
owner of money gives up for money, is an
immoral practice, how much more immoral it is
not even to give receipts ! How utterly hypocritical
it is to proceed against the counterfeiter of a
forged note, who gives a false receipt, for treason
rather than theft, and strictly to limit by Act of
Parliament the amounts which the banks are
allowed to obtain from the public for nothing by
the issue of tangible receipts, while allowing them
to extract for their own profit incomparable
vaster amounts so long as they do not acknow-
ledge the receipt at all !

The Private Issue of Money. By allowing
private mints to spring up Parliament has
fundamentally and perhaps irretrievably betrayed
democracy. Before the War shed a penetrating
light into the nature of money systems in general
it was customary even in the works of apparently
respectable economists to find absolutely dishonest

THE THEORY OF MONEY VIRTUAL WEALTH 31

hair-splitting distinctions between the invisible
money so created and paper notes. The latter
were really money and the former was not !
In fact, the reader can always tell in such standard
works on the subject when he is approaching the
fishy part of the business. The essential fact,
the creation of new money, becomes obscured
in a cloud of anticipatory justification and elaborate
special pleading. This is no longer even possible,
and one may be thankful to find nowadays some
technical writers on this malodorous subject who
are content to state the facts unequivocably and
to leave the reader to draw his own conclusion.

True, the old credit system " based on gold "
kept the currency from being progressively and
permanently debased relatively to the exchange
value of gold by forcibly bringing it back again
after it had been debased by compounding for
the robbing of Peter to pay Paul by the subsequent
ruination of Paul to pay the bank. Simple, and in
many ways good, as real gold and silver currencies
are, they involve a vast amount of futile human
effort in the search for the precious metals, which
are then instantly rendered unavailing for any
legitimate aesthetic or industrial application. But
it is mere pretence to ascribe such solid
advantages, as they may have, to modern systems
pretending to be based on them, but really using
them brutally to restore the value to money after
it has been diluted, to the hurt of the innocent
and profit of the guilty.

32 THE ROLE OF MONEY

For over a century there simply has not been
nearly enough gold and silver in the world for the
requirements of a pure barter-currency. As regards
actual present conditions in this country and else-
where, since the final breakdown of the " gold-
standard ", we are now committed to an almost
pure credit-debt money, but instead of any definite
standard we have entered upon a stage of
" monetary policy " in which the price-level is
modified deliberately from time to time by
irresponsible judges according to what they
conceive to be " policy ", and without the slightest
regard to the elementary principles of justice
and fair dealing to those who own money, and
that is to everyone in common, who have given
up equivalent value for it.

Monetary Policy. Monetary policy would be
better described as " weights and measures
policy ", for it is simply a universal means of
juggling with the standards of weight and measure-
ment. No one outside of metrical science is
really interested in the absolute value of the latter.
The economic use of them is purely relative to
money how many pounds of coal to the , how
many pence for a pint of beer. Making the buy
less or more of pounds or pints is the same in all
economic affairs as making the pound and the pint
weigh and measure less or more than before. It
substitutes for false scales and measuring vessels
universal and inescapable swindling mechanism.

We are living in an age rendered great by the

THE THEORY OF MONEY VIRTUAL WEALTH 33

precise sciences and it is idle to try and link our
money still to the old semi-idolatrous lure of
gold and silver. Books could be and have been
written for and against the system of linking
the exchange value of commodities to the one
commodity, gold, without even attempting to
answer the real question of what it is that does
give money its exchange value. It is true that
simple barter-currencies can keep money constant
in value relatively to gold or silver. But that by
itself has no meaning, unless an answer can be
found for the question, what fixes the value of
these relatively rare metals, almost completely
confined in use to luxury purposes, in terms of the
things universally necessary for life to continue
at all ? That there is a question to be answered
is obvious when we deal with pure paper and
credit forms of money, and it is almost as obvious
that the answer can only be found in what is here
taken as the essential feature of money in general,
since it is the only feature this form of money
exhibits. One has to give up just as much for a
paper i as for a golden sovereign. There is no
difference in the two kinds of money in this aspect,
and so it is this aspect which is the common
criterion of all forms of money.

What Gives Value to Money. Its exchange
value depends, in fact, simply on the amount of
wealth people voluntarily prefer to go without
rather than to possess. The value of money
depends to be sure on how much people want

34 THE ROLE OF MONEY

money, but the prevailing loose and confusing
meaning attaching to any such phrase as " people
wanting money " makes it necessary to add
"instead of wealth". Again, " demand for money,"
" abundance or scarcity of money," " price of
money," and so on, are technical expressions of
the loan market. In genuine loan transactions
of any kind the lender gives up the credit that is
money to another who expends it in his stead,
and in national economics it is not the individual
who spends it but the fact of it being spent that
is of importance. Since people do not borrow
money and pay interest on it merely to hoard it,
genuine lending and spending in this connection
are synonymous. Whereas what determines the
value of money is the amount of wealth people
prefer to go without ; and that is the same as the
amount of credit they retain as money.

All the common phraseology of money stresses
only the something you get for it by getting rid of
it, rather than the prior consideration of what you
give up by acquiring and retaining it. From the
first standpoint peoples' demands for it are
insatiable ; from the second it would be truer
to say, misers excepted, that people keep as little
of it as is safe. They want as much on the average
as will enable them to conduct their avocations
and domestic affairs without inconvenience and
embarrassment. They want enough to buy what
they can afford to buy as they need it. If they have
more than this they spend or invest it. In either

THE THEORY OF MONEY VIRTUAL WEALTH 35

case they put on somebody else the onus of going
without the things it will buy. It is highly
important to recognize at once that investing is in
this connection spending just as much as lending
is and for the same reason. The reader must
remember that in this inquiry the ordinary
attitude of the individual to money is assumed to
be perfectly understood, and it is not this aspect
but rather the communal aspect of money that is
being investigated.

Two Fundamental Monetary Principles. There
are two considerations here that are of importance.
The first is that buying, selling, investing, genuine
lending, and borrowing, have no effect what-
ever on the quantity of money and that is the
quantity of wealth the community goes without
since what one person gets or gives up another
gives up or gets. Somebody, that is to say, has
to own all of the money all of the time, and go
without the substance for the shadow. Much as
individuals may appear to be free to exercise
their choice, they are free only in so far as the
requirements of others may be the opposite or
complement of their own. If, among the com-
munity, buying is more in evidence than selling,
the price-level rises and the value of the money
unit falls. If selling predominates over buying,
the opposite occurs. Assuming that the quantity
of money does not change, the first means that
the community chooses to give up less goods
and service than when the price-level does not

36 THE ROLE OF MONEY

change ; and the second that it chooses to give
up more.

The second point of importance is that, though
individuals die and their affairs are wound up,
communities go on indefinitely. So that in a money
system we are really not contemplating any
temporary voluntary forgoing of something for
nothing to suit the individual's preferences and
convenience, but, on the part of the community,
an enforced abstinence from use and ownership
of buyable goods and services equal in aggregate
price or value to the aggregate quantity of money
in the community.

Virtual Wealth. This aggregate of exchange-
able goods and services which the community
continuously and permanently goes without
(though individual money owners can instantly
demand and obtain it from other individuals)
the author terms the Virtual Wealth of the
community. It fixes the value of the aggregate
of money whatever the latter may be. The value
of each unity of money, such as the , in goods,
or what is termed the " price-index " or " price-
level ", is thus the Virtual Wealth divided by
the total aggregate of money. The latter in a
credit-money system may be anything whatever,
but the former is definite and is dictated by
the necessity of people retaining sufficient
instantaneously exercisable credit for goods and
services to enable them to get what they want as
they want it. They may have a great variety of

THE THEORY OF MONEY VIRTUAL WEALTH 37

other forms of credit goods, services, jewellery,
investments, real estate, and property but in
a monetary civilization, as distinct from one
practising barter, these all have first to be sold to
a buyer, that is exchanged for the credit that is
money, before people can get what they want as
they want it. In this, selling services for money is,
of course, more usually termed earning (wages,
salary, fees, commissions, and so on).

The Community's Credit. What is here called
by the special name Virtual Wealth is often
intended by monetary reformers when the much
wider and more general term, credit of the public
or of the nation, is employed. In reality Virtual
Wealth is a special and peculiar part of the credit
of the nation. The credit of a nation may be,
and for the most part is, in no way different from
that of individuals, in the ordinary sense of their
ability to run into debt. Thus the relation that
governs the ordinary national debt is the same as
if it were owed amongst individuals. The nation
has drawn on or expended its credit to the extent
of seven or eight thousand million pounds by
borrowing these sums from individual citizens
on various terms as regards interest payments and
repayment, if ever, in the future, and these
individuals own debts for the sums of money
which they have empowered the Government to
spend in their stead. They hand over their
money and the Government buys itself goods
and services.

38 THE ROLE OF MONEY

The Virtual Wealth, on the other hand, is the
credit established by individuals with the nation,
through which, in the first place, the inter-
mediate form of payment, money, comes into
existence. It is established by goods and services
being handed over directly to the issuer of money,
repayable as such not from the issuer (unless
issued by the nation) but from the community
on demand, the debt not bearing interest to the
creditor, so long as he retains the credit and right
of instant repayment. Interest, obviously, can
be exacted from debts only repayable, if at all,
on some future date, and not on those which the
owner can be repaid at any time but chooses
to postpone payment.

Credit Money a Tax. But, from the standpoint
of the community, credit money is simply a form
of forced levy or tax impossible to resist, the
aggregate of such creditors having no option in
the matter, as in other forms of the debt-credit
relation. Anyone issuing money, whether the
State, bank, or counterfeiter, makes a forced levy
on the goods and services of the nation which the
existing creditors, in their capacity as money-
owners, give up through the corresponding
reduction in the value of each unit of their money.
When taxation, or other form of expropriation of
the property of the individuals by the State,
has yielded all that the latter can be compelled
to surrender, the last resort of the tax-gatherer
and it is completely inescapable is the issue of

THE THEORY OF MONEY VIRTUAL WEALTH 39

new money, and it can be continued until the
whole of the money is reduced to relative worth-
lessness. In this way, of course, after the War
the defeated nations, Russia, Germany, and
Austria, raised revenue when no other means
were possible, and at the same time repudiated
all pre-existing debts so far as they were repayable
in money.

Many, no doubt, until they get familiar with it,
will question the use or necessity of this con-
ception of Virtual Wealth, and hold that it does
not really explain the value of money. To
individuals it may seem a quaint and sophisticated
inversion of common usage. Rather it is the first
step towards reversing the inversion induced
in peoples' habits of thought by regarding money
as the primary definite and important factor, and
the wealth it will buy as a consequence or inherent
property of money. It is the wealth all people
must involuntarily give up and go without that is
the primary factor that endows money with the
power of buying at all. If all refused to go without
anything for money and claimed all the wealth
to which they are legally entitled in exchange for it,
there would only be buyers but no sellers, and no
wealth whatever to satisfy even a single one of
them. In so far as the money may incorporate
or be " backed " by a valuable material, which
can be recovered by destroying it as money, there
is this much to satisfy them, but in so far as it
is pure credit money there is absolutely nothing.

40 THE ROLE OF MONEY

" Backed " Money. If we consider an inter-
mediate form such as a paper money " backed "
by a deposit of some type of legal securities, then
behind the one kind of debt, money, there is
another kind of debt which the existing owner
may be legally compelled to surrender. This may
than be exchangeable for the wealth the owner
needs much in the same way as, but less simply
than, by money. But in this case it would still
be true to say that the wealth which the owner
of money has given up, and is owed for, does not
exist. For the securities " behind " this sort of
money are already in the, possession of owners,
and the process is merely the enforced expro-
priation of their property in recovery of a
repudiated debt. In Ruskin's words it is " the
root and rule of all economy that what one person
has another cannot have ", and the worst blunders
of the ordinary conventional economist will be
found to have arisen from the attempt somehow
to count twice over property with two owners,
where, as in this case, the rights of the one begin
only when those of the other end.

Money a Claim to What Does not Exist. The
essential feature of money is, as McLeod fully
understood, that it is a legal claim to wealth over
and above the wealth in existence, all of which in
an individualistic society is already in the owner-
ship of others independently of this claim. Even
in the case of a gold coinage bearing the imprint
of the nation or its ruler it is quite customary and

THE THEORY OF MONEY VIRTUAL WEALTH 41

nearer the truth to regard the gold as the property
of the nation or ruler rather than of the individual
owner of the coin. So that, without any real
exception, we reach the conclusion that over and
above all the existing property, all of which has
owners already, the owners of money possess
claims to what they have given up, but what they
have given up does not actually exist. The best
physical analogy to this is to regard the wealth
of a community as reckoned not from the zero
of " no wealth ", but from a negative datum line
below it by the amount of the Virtual Wealth,
just as for purposes of special surveys it may be
convenient to reckon the level not from average
sea-level as customary, but from some level
below it, as, for instance, the lowest tidal-level.
There is no real mystery about money, as there is
about psychic phenomena, but merely a sort of
spurious mathematical mysticism introduced by
the invention for the purpose of calculation of
imaginary negative quantities which are quite
legitimate if the nature of the convention is under-
stood. Unfortunately it is not.

The Price-Level. For all practical purposes
the Virtual Wealth at every instant is " measured "
(in money value !) by the aggregate of money. If
the latter is a thousand millions the community
are voluntarily refraining from possessing
a thousand millions' worth of property which
they have the right to own and do not. Nowadays
the quantity of money does not stay put. It is

42 THE ROLE OF MONEY

varying wildly from minute to minute of the
working day. From one year to another it may be
arbitrarily varied within the year by hundreds of
millions to suit some " policy " designed to
increase or decrease the value of the unit. It is
not, however, the Virtual Wealth that changes.
That is a very conservative quantity indeed, as it
is dictated by the people's necessities and habits,
which they alone can change. But the Virtual
Wealth being always divided up into a larger or
smaller number of units, the price-level or value
of each unit varies proportionally with the
aggregate of money, considered as one in-
dependently operating factor. On the other hand,
normally in these days of continuous expansion,
over long enough periods there is and should
be a steady gradual appreciation in the value of
the Virtual Wealth, both on account of increase
of population and on account of the rise of the
standards of living. If this is not kept pace with
under a credit-money system by the issue of
correspondingly more money, we have the
paralysis brought on by a continuously falling
price-level and the ruination of producers in the
interest of the rentier.

But, as will appear later, it is absolutely
essential for the purpose that it should be issued
freely as a gift to the nation, which gives up
gratuitously the goods and services it is worth,
and then only after the increase of prosperity
has occurred when goods without money to buy

THE THEORY OF MONEY VIRTUAL WEALTH 43

them are actually awaiting sale. If, as in the past,
it is issued as a debt to the banks for producers
to buy goods and services to sink in new
production, in addition to making the issuer of
money the uncrowned king, it cannot be issued
without raising the price-level. The general
commonsense proof of the latter consequence
is that you do not by mere tricks of accountancy,
involving imaginary negative quantities, affect
by one iota the physical processes by which new
wealth is created, but only those by which the
incidence of the distribution of the existing
wealth among its various claimants and owners
is effected. It is amazing, but nevertheless quite
in keeping with the age that is passing away,
that till quite recently it was common to ascribe
to " the moral mystery of credit " and the peculiar
virtues of the British banking system the expansion
of wealth that was due to the growth of knowledge.
Thus the " orthodox " fell into the very same
error that they were, and are, so fond of ascribing
to other, especially monetary, reformers, namely
the absurdity of thinking that all could get rich
by means of the printing press and by " tinkering
with the currency ".

Money from the Issuer's Standpoint. So far
we have been dealing with money as a public
instrument replacing barter and have traced the
essence of the invention to its enabling those,
with goods and services to dispose of, to give them
up freely for nothing with a more or less certain

44 THE ROLE OF MONEY

assurance that, and as a quid pro quo, they thereby
became empowered in turn to receive goods and
services on the same terms from others as they
need them. Now we have to look at the money
from the point of view of those who have hitherto
expounded it, to whom money is the something
for nothing before anyone can get anything, as it
is to those who issue it in the first instance. To
these fortunate people the criterion as to what is
and what is not really money appeared to depend
on fine degrees of general acceptability. Usually
an imaginary line was drawn between the bank-
note and the cheque on the ground that though
both were in reality demands on the bank for
money (which in this country is now no longer
even true of the first), yet the bank-note had by
custom become generally acceptable, whoever
presented it, while the cheque was so only if
tendered by the person to whom it was drawn
or other person authorized by him.

All of this, from the standpoint of the public
who use money for its legitimate purpose and
spend the greater part of their lives striving that
they may not be left without it, is pure sophistry,
while on the academic side the analysis is entirely
superficial. Since the War, it is refreshing to
notice that even the orthodox admit, however
much may be said for regarding the cheque as
not really money, that there can be no dispute
that the deposits at the bank on which the cheque
is drawable, and which have come into existence

THE THEORY OF MONEY VIRTUAL WEALTH 45

as the result of the invention of the cheque
system, are most certainly money. Thanks, no
doubt, in part to the existence of monetary
reformers and the ridicule they have poured on
these shibboleths which are or were the stock-in-
trade of their opponents, but, even more, to the
almost incredible blunders and confusions
perpetrated since the War in the name of " sound
finance ", the general public is to-day too wide
awake to the diametrically opposite interests of
those who live by creating and destroying money,
and of those who have to acquire it as a licence to
live at all, to be hoodwinked any longer by such
evasions.

Money not now a Tangible Token. The
distinction between what has a physical and
tangible existence, like coins and notes, and what
has not, like bank deposits, is a highly sinister
and dangerous one, but it is not a distinction
between what is money and what is not. A legal
right of action against a bank to supply money
on demand is to the owner of it as effective as
money itself and usually more convenient. It is
of no great significance that the bank is able
to cancel, by the cheque system, the bulk of the
cheques drawn on it against those paid into it,
so as to dispense with tangible money altogether
except for the difference between the two amounts.
This merely substitutes for an automatic system
of accounting by physical counters a clerical
book-keeping system which is fraudulent because

46 THE ROLE OF MONEY

it does not start reckoning from zero but from
some continuously varying negative value.

Money is a right of action against the com-
munity to supply goods and services or, what is the
same thing, to discharge the debt incurred through
obtaining them from the vendor, so that a right
of action against a bank to supply money on
demand is a right of action against the com-
munity to supply goods and services on demand.
Every ordinary person, of course, knows that
money is a claim to goods and it is of no practical
importance if, in theory, he has to claim that claim
from a bank before he can claim the goods. One
might as lief argue that a bicycle left in a cloak-
room was not a bicycle but a right of action against
the railway company to supply a bicycle. The
highly sinister and dangerous distinction refers
not to the aspect usually stressed, nor to that so
far stressed in this chapter, but rather to the origin
of the money and, if it is destroyed, to its
destruction.

The definition of modern money with which we
started makes clear that before it can come into
existence some one has to give up something for
nothing to the issuer of it in the first instance,
and the aggregate the community so gives up is
called the Virtual Wealth of the community.
Dealing with a gold or silver money of full value
the issuer has also to give up full value for the
money, but he renders it, while used as money,
merely a token otherwise useless, with the result

THE THEORY OF MONEY VIRTUAL WEALTH 47

that all the effort expended in the winning of the
precious metals used as money is effectually
wasted. But in the issue of every other form of
money the issuer must get the something gratis.

Change-over from Barter to Credit-Money.
It is easy to see this if we suppose a community
practising barter or using a pure barter gold
currency to change suddenly to a credit system.
It would be similar to starting to play a game with
money with a common pool, in which each of the
players before he was entitled to play had to
contribute so much money to the pool, except
that, instead of money, in the one case goods or
other exchangeable property and in the other case
gold coins, now withdrawn and reverting to their
original function as a commodity, would be paid
into the pool in return for receipts in the form of
the new credit-debt money. The consequence
would be that the croupier, or authority in charge
of the pool, would be holding in trust for the
community various forms of property equal to
the Virtual Wealth of the community. But as
there is no intention of ever winding up the
monetary system in the future, it is clear that all
this actual wealth, equal to the Virtual Wealth
in value, would remain permanently in the pool.
If the community prosper and expand, the pool
will naturally tend to grow rather than decrease,
through the people increasing their Virtual
Wealth and giving up the equivalent actual wealth
for it in exchange for the receipts that are money.

4o THE ROLE OF MONEY

It can only decrease through the community
decreasing in numbers or well-being and it can
only be reduced to nothing by the community
ceasing to exist.

There would then arise the situation which the
banking profession first discovered and kept as
a trade secret. They acted as croupiers and
received the public's gold voluntarily surrendered
to them on loan or for safe-deposit, and issued
notes for it that were at once receipts for the gold
given up and promises to pay it back on demand.
Then these notes began to circulate as money.
At first for every note that remained in circulation
the gold lay idle in their safes, and on the average
they always held a much larger quantity of gold
than sufficed to repay those who, instead of using
the notes to pay their debts, demanded the gold
back from the bank. This did not last long, for,
naturally, they began lending some of the gold
out at interest to safe borrowers, and only kept
enough to satisfy their clients demanding gold.
The situation then was that they owed their
depositors more gold than they could at any time
repay, but were in turn owed as much gold by
those to whom they had lent it, and were under
bond to bring it back at some date in the future.
But this did not last long either.

The False Step. It is this next step which ushers
in money in its present modern sense in which it
is an essentially new invention, and all the sub-
sequent steps are merely elaborations of the

THE THEORY OF MONEY VIRTUAL WEALTH 49

original. For the bankers began soon to lend not
gold but their own notes, or promises to repay
gold which neither they nor their depositors
possessed. Even if there was so much gold in
existence at all, it was the property of and in the
possession of others entirely outside the circle
of their business. The situation, then, was,
assuming that they only lent notes and no gold,
keeping the latter as a " backing " for their note
issue, that they owed gold to the extent of their
client's " deposits " plus the outstanding note-
issue in circulation, which they were pledged
to redeem in gold if returned to them, and against
the debt they held the gold backing in their vaults
and the securities or " collateral " of their
borrowers, that is of those to whom they had lent
notes (promises to pay gold), but from whom,
naturally, they would have to accept their own
notes in repayment of the debt if presented to them
instead of gold.

This is the origin of modern money as nothing
for something on the part of the legitimate user ;
as something for nothing on the part of the issuer ;
and as something for a promise to pay it back on
the part of the borrower, with sufficient security
to whom the issuer transferred the acquisition
of the something accruing gratis from the issue.
It is all very easy to understand from the stand-
point of Virtual Wealth, and the necessity that the
aggregate of the individuals of the community
must give up for nothing and be permanently

50 THE ROLE OF MONEY

owed for part of their possessions if they are to
avoid barter or a barter-currency. If from the
first the creation of money had been preserved,
as it should have been, as the prerogative of
the State, the chequered history of the last
two centuries and the impending dissociation
of the whole Western civilization would never
have occurred. But the banker alone knew this
aspect of money, and for long he kept it as
the high secret of his trade. But it is a secret
no longer.

Why was it False? Why is it so vital to the
safety of the realm that money, and particularly
credit money, should be the prerogative of the
Crown, as a central authority representing the
whole nation ? The reasons are numerous, but
by far the most fundamental is apparent if we
consider again the above stage, which represents
the invention of modern money in the sense
defined. A new currency has been created by the
banks through people engaged in industry
incurring debts to the banks which cannot be
repaid except by destroying that currency, for there
is nothing else to repay it with. When the banks
borrowers have to repay they must either find
gold, which for all the bankers knew or cared had
no physical existence, or the bankers' own notes.
Now these notes were not given away. The
amount of the issue is the amount owed to the
bank. By the issue of new money the debt to the
bank is created and by the repayment of that

THE THEORY OF MONEY VIRTUAL WEALTH 51

debt the money is destroyed again. Clearly
long before any great proportion could be repaid
there must arise a shortage of money and all the
remaining debtors would be physically unable to
obtain the money, that is to sell their produce or
manufactures at any price.

The Banker as Ruler. From that invention
dates the modern era of the banker as ruler. The
whole world after that was his for the taking.
By the work of pure scientists the laws of con-
servation of matter and energy were established,
and new ways of life created which depended
upon the contemptuous denial of such primitive
and puerile aspirations as perpetual motion and the
ability ever really to get something for nothing.
The whole marvellous civilization that has sprung
from that physical basis has been handed over,
lock, stock, and barrel, to those who could not
give and have not given the world as much as
a bun without first robbing somebody else of it.
Industry and agriculture, the producers of the
positive wealth by virtue of which communities
live, can only expand by getting deeper and deeper
into debt to the banks. They have been reduced
to permanent and inescapable bondage by a subtle
and, in its place, useful form of accountancy
that continues to count below the level at which
there is anything to count. The skilled creators
of wealth are now become hewers of wood and
drawers of water to the creators of debt, who have
been doing in secret exactly what they have

52 THE ROLE OF MONEY

condemned in public as unsound and immoral
finance and have always refused to allow Govern-
ments and nations to do openly and above board.
This without exaggeration is the most gargantuan
farce that history has ever staged.

The Profits of the Issue of Money. We left
our hypothetical community suddenly changing
from barter to credit-debt money, with the central
issuing authority in possession of gold and other
property of value equal to the Virtual Wealth of
the community, and the latter in possession instead
of the receipts for what they had given up which
are to serve them in future for ever after as money.
Clearly the whole stock of valuable property in
the possession of the issuer cannot in practice
be left as a " backing " for the money. All of it
if unused, except the gold and jewels, would rot.
As there is not enough of such imperishable forms
of wealth to serve as money, it is idle to relegate
all there is to the utter waste of permanent
incarceration in strong rooms and vaults, as
part security for a debt that can never be repaid
except by the community reverting to the
primitive barter system which it has outgrown. It
needs but common sense to suggest that it should
all be used at once for the general purposes of the
community by defraying part of the necessary
public expenditure out of this store, which would
otherwise have to be met by taxation. As the
Virtual Wealth of the community grows, the
further wealth it has to give up for the further

THE THEORY OF MONEY VIRTUAL WEALTH 53

new money it needs ought also to be devoted to
the same purpose.

Many people commencing the study of money
over-estimate the amounts that can be got from
the community for nothing by its issue. It is
even suggested that taxation could be entirely
met this way and still some would be left over for
free distribution ! But the amounts so obtainable
gratis are not likely to embarrass any modern
Government ! Though large from the point of
view of the individual, they are small compared
with the scale of national expenditure. Lively
hopes again have been entertained in many
quarters of providing national dividends out of
such new money, but these seem to depend on
simple mistakes as to the nature of an actual, or,
indeed, conceivable, money system. Any given
single quantity of money will normally go on
distributing goods and services for ever at a
constant rate if the price-level remains unchanged,
so that the total quantity of goods and services
it will forward from production to consumption
and use is unlimited. No new money at all can
be issued unless and until there is an increase of
the rate of production. It is only when the rate
of production and consumption increases, that is
to say when the quantities of wealth produced
and consumed per year, or in any other unit of
time, increase, that proportionally more money
has to be issued if the price-level is to remain
the same.

54 THE ROLE OF MONEY

Money Indestructible without Expropriation.
It is nonsense to suppose it can be destroyed
" when it has done its work ". It cannot be so
destroyed without the owner of it being expro-
priated of his claim to goods and services. The
facility with which the banks can destroy money
as well as create it depends on the fact that such
money is not given away at all, but only lent,
and the credit money that was created for the
borrower is automatically expropriated from him
again and disappears from existence when he
repays the loan. Whereas the suggestion to pay
national dividends out of such credits does not
contemplate lending money at all but giving it away,
and such claims to wealth cannot be destroyed
again except by taxation, or some other form of
expropriation, compelling the owner to surrender
up for destruction the money so issued. It is
positively amazing how ready some people are
to believe in magic still.

It is not, of course, contended that the profits
of the issue of new money could not be issued
to consumers as a national dividend, but merely
that the amounts would hardly be worth while,
since practically every consumer already pays
far more in taxes than he could hope to receive
from such a source. It would seem more natural
to use the profits of the issue of new credit money
for the general relief of the taxpayer. But the
total quantities of money that have been privately
issued in" the past would, if now applied to the

THE THEORY OF MONEY VIRTUAL WEALTH 55

relief of the taxpayer, effect a very worth-while
reduction in his burden, something like 2 per
head of population per year. Once this were done
the further annual amounts that would be
necessary in this country, if distributed, either as
a relief to taxpayers or as a national dividend,
could hardly be more than a few shillings per
head per annum, that is if the price-level is not
to be increased. If the price-level is not held
constant, but allowed to rise continuously until
ultimately the money becomes worthless, then,
of course, there is no limit at all to. the amount
of money that can be distributed as a national
dividend, or issued in lieu of imposing taxation.
But to contend that a worth-while national
dividend can be issued and prices prevented
from rising by legal enactments is nowadays
absurd. For everything so got gratis must be
exactly accounted for in the new economics by
others going without it, that is by their retaining
without spending it more money than before by
the extra amount issued. They must do this
anyway, but whether that means that they are
voluntarily giving up more wealth for it than before
is entirely a question of the price-level. If they
cannot afford to do so then the price-level will
rise and the money becomes worth less.

CHAPTER III
THE EVOLUTION OF MODERN MONEY

r T 9 HE Origin of the Cheque. In point of time
* the invention of the cheque antedates that of
the bank-note, originally a promise to pay gold on
demand. It was customary for merchants who
had deposited gold for safe keeping at the gold-
smiths, the originators of " banking " as it is
still called, to write an order or instruction to them
to hand over some definite amount of their gold
to another person than themselves, named in the
order, who, on presenting it and endorsing it as
evidence that it had been carried out, was paid
this amount. It was a means of settling accounts
with creditors by instructing the keeper of the
debtors' funds to settle them without the debtors
needing themselves to draw out the money, which
is exactly analogous to the modern cheque.

From the first, however, the bankers developed
the bank-note, for this was a powerful means of
spreading their reputation for honest dealing and
trustworthiness through the whole community.
People finding they could always if they wished
exchange bank-notes at the bank for gold, became
accustomed to accept them whoever tendered them
in payment, and not to change them for gold at

56

THE EVOLUTION OF MODERN MONEY 57

the bank except for special reasons, as when going
abroad, whereas the name of the drawer of
a cheque would be known to relatively few people
and therefore had not the same degree of general
acceptability as the note as a form of money.
Honest dealing and trustworthiness then meant
ability to give the gold for the paper whenever
asked. At that time it was what mattered most,
and there is no doubt that the early banker was
a social benefactor in inventing a credit medium
of exchange when gold no longer sufficed. This
old-fashioned type of banker would be appalled
at the terrible power that he has placed in less
scrupulous hands.

It was to the banks' direct interest to see that
counterfeit imitations of their notes were promptly
detected and removed from circulation, and that
those issuing them were tracked down and
severely punished for doing, as it now appears,
something far less socially dangerous in its ultimate
consequences than what the bankers were doing
themselves. But at that stage in the evolution of
money the physical impossibility of repaying the
debts they were so careful to create for that
purpose was not understood, and the public
were still firmly convinced that the convertibility
of the paper into its nominal worth of precious
metal constituted the note money. Whereas the
paper itself was money because the owner had
given up that value of goods and services to acquire
it, and was therefore entitled to an equivalent

58 THE ROLE OF MONEY

value in exchange for it. The whole money-
issuing interests, however, continued by every
means in their rapidly growing power sedulously
to propagate the other point of view. That is
why they and the politicians thought that there
would be an outcry when there came into force
at the outbreak of the War the scheme for recalling
all the gold and substituting a pure credit money.
But there was no outcry whatever, most people
actually preferring in use the new paper notes to
golden sovereigns. Neither has there been any
justification, from the point of view of public
prejudice, for the persistent and ruinously
unsuccessful post- War efforts to return to gold.
What the public want is a constant price-index,
so that the value of money remains stable in goods
and services. That they cannot have, as we shall
see, without destroying " banking " as now
understood. Here, as always, one has to
distinguish very sharply between the interests of
the public and those of their real rulers ; and so
far democracy has never had a government that
could trust itself to rule independently of the
money-power.

Government Regulation of " Banking ". But
though the public were sedulously protected in
the banks' interest from the counterfeiter, they
were not protected from the failures of the banks
to redeem their impossible promises, which
became so frequent and caused such widespread
ruin that the whole monetary system in this stage

THE EVOLUTION OF MODERN MONEY 59

of transition was jeopardized. There were many
reasons for this. The Government having allowed
in the first instance the banks to usurp their
prerogative in creating money, instead of creating
it themselves, attempted in every possible way to
hamper and thwart them. So far, at least, as the
country and commercial banks were concerned,
they were suspicious and hostile to innovations
which seemed to go against the ordinary standard
of commercial morality and to be a new form of
counterfeiting. But as regards themselves they
acted differently. Instead of issuing sufficient
money themselves, they more and more favoured
and empowered one bank, the Bank of England, to
act for them in return for its raising revenue for
Government purposes. This bank was founded
in 1694 in the reign of William III, on the model
of earlier Italian banks, to provide the Government
with funds, and it lent money at interest first in
return for permission to issue notes of equal
amount, and was soon rewarded by a monopoly
of note issue, redeemable in gold coin on demand,
which lasted till 1709. From its genesis to this
day it has never been a bank of the English nation,
but a bank to provide the Government with
money primarily and principally for war
expenditure a weapon which the Government
can, and does, employ against the people. But
from being what is known as a bankers' bank,
it has become now almost the Government's
government.

60 THE ROLE OF MONEY

Outside of this object State regulation of
" banking " has been restrictive. Speciously
directed to protecting the public from being
swindled by dishonest and unsubstantial banks,
it rendered the position of honest and then socially
minded bankers so precarious that their failure
and the consequent ruination of merchants and
commercial people became almost inevitable.
The policy culminated in the Bank Charter Act
of Sir Robert Peel of 1844, which nominally
fixed the monetary system in this country up to
the War, but through which the banks soon found
they could drive a coach-and-four. It legislated
to limit and ultimately to extinguish the issue of
bank-notes in England except by the Bank of
England, limiting the latter's issue to fourteen
millions above the gold reserve (the so-called
fiduciary issue, because it was supposed to be
founded on the public's confidence rather than
on their necessities). This effectively checked the
expansion of the note currency and the upshot
was that the cheque, at first secretly, took the
place of the note as a means of creating new money
and soon became the overwhelmingly pre-
ponderating form of the credit medium of
exchange.

Lending Cheque-Books. Instead of printing and
lending notes, an obvious creation of money, this
much more insidious and dangerous form of issue
grew up. The borrower without money was
allowed to draw cheques just as if he had money,

THE EVOLUTION OF MODERN MONEY 6 1

and to create an overdraft at the bank. The bank's
balance-sheet was falsified so that it still balanced.
For on the one side would be credited to the
individual the limiting sum up to which he was
authorized to overdraw and on the other side the
same sum as owing as a debt of the individual
to the bank. Naturally, as always, substantial
security or " collateral " had to be deposited
with the bank before the privilege was granted,
considerably more in value than the amount of
the overdraft, to provide an ample margin of
safety to the bank. If the debtor defaulted a forced
sale of the security recovered from the public
the sums he had been allowed by his overdraft
to put into circulation. Under such circumstances
the security could not be expected to fetch its
real value. As, moreover, such liquidations occur
in times of bankruptcy when money is scarce
and prices low, whereas " loans " are wanted in
times of boom when money is abundant and prices
high, the banks so were enabled to acquire
valuable securities at forced-sale prices. They
had only to hold the securities till " confidence "
returned, when they were re-issuing the money
they had called back so that it was again plentiful,
to realize much more for them than they had
fetched when sold to recover from the public
the money the overdraft had put into circulation.
It is important to realize that whichever way it
works it is a case for the bank of " Heads I win,
tails you lose ". Moreover, the money in which

6 2 THE ROLE OF MONEY

they are repaid is, on the average, worth more in
goods than that which they create to lend.

There was essentially nothing new in this, or
different in principle from lending " promises-
to-pay-gold " instead of gold itself, save that the
banks avoided the necessity of giving printed
receipts for the goods and services their borrowers
obtained for nothing, and there was a secret instead
of open creation of money. Instead of lending
notes, the banks, in effect, now lend cheque-
books and the right to draw cheques up to limited
sums beyond what the borrower possesses. For
nearly a century, until the revelations of the War
made it impossible to conceal the truth from the
general public, the bankers stoutly denied that
they were creating money at all, and claimed that
they were merely lending the deposits their
clients were not using. The President of the Bank
of Montreal not a year ago continued to repeat
this, but, nearer the centre of things, all this was
known and admitted by the orthodox apologists
for this monstrous system even before the War,
usually by some such lying phrase as " Every
loan makes a deposit ".

Genuine and Fictitious Loans. For a loan, if it
is a genuine loan, does not make a deposit, because
what the borrower gets the lender gives up, and
there is no increase in the quantity of money, but
only an alteration in the identity of the individual
owners of it. But if the lender gives up nothing
at all what the borrower receives is a new issue

THE EVOLUTION OF MODERN MONEY 63

of money and the quantity is proportionately
increased. So elaborately has the real nature of
this ridiculous proceeding been surrounded with
confusion by some of the cleverest and most
skilful advocates the world has ever known, that
it still is something of a mystery to ordinary
people, who hold their heads and confess they
are " unable to understand finance ". It is not
intended that they should. But if, instead of
trying to puzzle it out along the lines of " what
you get for money ", these people will reverse
the procedure, as in this book, and do so on the
of " what you give up for it ", the trick is clear
enough.

Current Account Deposits. Cheque-account
deposits at the bank represent, in monetary units
of value, what the owners have given up in the
way of goods and services in order to acquire
these claims to equivalent goods and services on
demand. In so far as one spends his money another
receives it, or in so far as one receives the goods
and services owing to him another gives them up
and is credited for them. With true " time
deposits ", however, it is quite different, though
banking practice has been directed to slurring
over the distinction. In an honest money system
this difference would be insisted upon as essential
to accurate accountancy. However, this is too
important a matter to deal with incidentally, and
its consideration will be postponed. We will con-
fine the argument here to cheque account deposits.

64 THE ROLE OF MONEY

The aggregate of the cheque-accounts, exclusive
of genuine time-deposits, represents in units of
money value, as stated, what the owners of money
(not the borrowers of it) dealing with the banks
are owed on demand in goods and services from
the nation in which the money is legal tender.
These vast sums of money are entirely of the
bank's creation in the first instance. When the
bank pretends to lend their money they do not
reduce the amount of the claims of the owners to
goods and services on demand by a farthing. They
do not inform them that they can no longer draw
it out as it has been lent to others ! They
create among the general body of vendors who
supply goods and services, in exchange for the
cheques the banks authorize their borrowers to
draw, new claims on the community for goods
and services. When these cheques are paid into
the vendors' accounts they create new deposits
at the banks. When the borrowers repay their
loans and balance their accounts, they with-
draw money for the purpose from those to whom
they sell goods and services, and by cancelling
their overdrafts this money then disappears from
existence, just as unaccountably as it made its
appearance. If we can imagine the impossible,
that they ever succeeded in freeing themselves
from their indebtedness to the banks, every
penny left would be worth half-a-crown and people
earning 3 a week would get 2s. a week.

Why Cheque-money is Preferred to Tokens.

THE EVOLUTION OF MODERN MONEY 65

We have only to substitute physical counters
or receipts to show the utter dishonesty of the
accounting. For if a man surrenders a physical
money token, whether to lend it to somebody else
or to buy something with it from somebody else,
there's an end of it so far as he is concerned. He
cannot ever lend or spend it again. He has to
earn another or wait till his loan falls due before
he can get another back to lend or spend again.
But a man who deposits his money in a cheque
account can lend or spend it exactly as though he
had not deposited it at all, by using a cheque for
the amount, and yet it is this same money the
bank pretends it lends out.

The Gold- Standard. It is only necessary very
briefly to consider the now obsolete methods by
which, up to the War, the quantity of money in
existence was kept in the perpetual state of ebb
and flow known as the Trade Cycle or Credit
Cycle, by making it convertible with gold. The
details of this " beautifully working automatic
regulation " is the stock-in-trade of all pre-War
conventional money writers, and need not detain
us. The quantity of money was regulated by means
of the gold-standard. The latter meant that the
value of the money unit in a large number of
countries was kept equal to that of a certain
weight of gold by making the money in theory
always exchangeable with gold. In practice it
meant the growth of a number of new devilries
having for their object the frustration of every

66 THE ROLE OF MONEY

attempt to exchange it for gold, so soon as that
exchange began to occur. Since there was only
enough gold in the whole world to be had for
a miserable fraction of the claims to gold, which
the easy method of lending cheque-books had
brought into existence, in no case must the bankers
be caught out. Everyone else bore the losses.
Boom or slump, the banker throve.

It was easy to fix the money price of gold, but
what fixed the goods price of gold ? Gold being
given a fixed price, the price of every other
commodity now varied in relation to the one
arbitrarily fixed. The average price, or the price-
level, during last century varied enormously.
There were five well-marked periods of changing
value in all countries, due to innumerable causes.
Apart altogether from human and psychical
influences, some of the more obvious physical
ones were the discovery of gold mines, the
invention of new technical processes by which
gold is extracted, the number of countries having
gold currencies in comparison with those having
silver currencies, and so on. It was really much
worse than standardizing the barometer height,
calling it a " bar ", whatever it was, and expressing
all lengths in terms of what the " bar " happened
to be at the moment. The variation of the price-
level in terms of gold was, however, over a range
of two or three to one. This makes the variation
of the barometer height in terms of the yard
or of the yard in terms of the barometer height,

THE EVOLUTION OF MODERN MONEY 67

whichever be taken as the " standard ", almost
negligible by comparison.

The capacity of the banks to create money
without giving up anything for it depended on
their always having enough legal tender (conver-
tible into gold) to meet the demands of their
depositors ; that is, of those who have deposited
money on " current account ". In practice it
was found that about fifteen per cent of their
total deposits sufficed for their safety but, as
the use of cheques continually increases, the
percentage falls. The factor of safety is now
considered to be about ten per cent, but may
not be nearly as much. Nobody but the bankers
themselves can see, in an age of potential plenty,
any sense in their always trying to make i do
the work of ^10 or more, when they have actually
created claims to nine others which the owners
have only to ask for to reduce them to panic, and
send them howling to the Government for a
moratorium.

The Correct Procedure. The proper thing to
do, of course, would be for the Government
to issue as many pounds as the citizens have
given up gratis pound's worth of goods and
services, not one-tenth as many, and it should
require the banks to hold for ever after i of
national money for every i in the current
accounts of the banks' depositors.

Since banking became in reality minting by
issuing cheque-books instead of notes, the banks

68 THE ROLE OF MONEY

have never been solvent, but have been liable
to have to stop payment so soon as they were
asked for more than one-tenth of the money (legal
tender) they owed to their current account
depositors. The measure proposed above would
make them solvent for the first time in the modern
phase of their history. The money being always
in the banks, there would be an end of the frenzied
shipments of gold back and forth, to raise the
value of money here and depress it there, to throw
goods intended for export suddenly on to the
home market and as suddenly to drain the home
market and ship the goods abroad, and all the
nefarious and unscrupulous devices which, in the
course of a century's experience of this secret
private minting, have been invented to keep the
world poor and maintain the supply of hard-
working borrowers in an age of plenty.

Outside of this real explanation, the sole
ostensible reason of it all is to prevent people
from asking for the money for which they have
had to give up the equivalent value in goods
and services, but for which the Government
has hitherto omitted to issue proper receipts.
True the Government has not done so because
it has as yet not received the goods and services,
but the hard-working borrowers have received
the money and have moreover furnished ample
security in the way of collateral for every pound
they have borrowed. The proposal, therefore,
is that the Government should issue the necessary

THE EVOLUTION OF MODERN MONEY 69

money to the banks in exchange for the borrowers'
collateral, so that henceforth these borrowers
owe, not the banks, but the nation which, not
the banks, has supplied the goods. They can
then repay their debts without destroying the
nation's currency and making it impossible for
them to find the money to pay. For as the loans
fall due and are repaid, the Government should
put the money back into circulation (or into the
pound-for-pound deposits of cheque users) by
buying with it National Debt securities and
destroying them. Thus an equivalent of interest-
bearing National Debt would be destroyed for
the non-interest bearing National Debt that is
money. For this money has been secretly issued
by the banks through the cheque system. This
occurred when the Government stopped them
from issuing bank-notes and sought to restrict
and control this form of currency through the
Bank of England. It is time the legality of these
operations was tested in the Courts. It is a
curious kind of law that makes the open issue of
money treason and its secret issue under a
camouflaged name, as bank-credit, so immune
from penalty that it was, till recently, treason
even to question its legality. But that is now all
out-of-date.

The Credit or Trade Cycle. Up to the outbreak
of the War the system worked out its inevitable
cycle in a relatively simple manner something
as follows.

70 THE ROLE OF MONEY

i. A period in which the increase of money
(through more bank loans on the average being
issued than are repaid) occurs faster than the
Virtual Wealth increases and prices are therefore
rising. There is abundance of goods in course of
production but owing to the loans being made
when the production is initiated rather than
in the correct manner, the new money being
issued to consumers, in relief of taxation, after
the new production has matured and is ready
to be sold production and consumption are
put out of phase. Production lags behind con-
sumption by about half the average period of
time taken to produce, since the new money
takes out of the market finished wealth to pay
the workers, and the latter only put in unfinished
wealth at its initial or some intermediate stage.
Later it will be necesssary to revert to this funda-
mental physical fallacy of the bankers' whole
monetary system.

But it is easy to see, even at this stage, both
why prices must rise and why the Virtual Wealth
cannot increase to the extent of the increase of
money so that the value of the latter is maintained.
People are always at the market with money to
buy some months on the average before the
goods are there. This causes a drain on the
existing stocks, and shortage of finished wealth,
so that unless prices rose there would be no
goods at all to sell for that part of the whole
money equal to the extra amount created. Of

THE EVOLUTION OF MODERN MONEY 71

course prices rise so that this does not happen.
But all get less goods for their money than before.
The money now being worth less than before,
people have to retain more of it to possess the
same Virtual Wealth (or credit for goods and
services) as before. Soon the increased quantity of
money buys no more than the original quantity did.

2. Though all other prices are rising, that of
gold is arbitrarily fixed. This, in itself, only means
that gold falls in value relatively to goods. The
effects of new issues of credit money are the same
as if new gold mines had actually been discovered.
The rise of prices tends to make existing gold
mining unprofitable and mines unable to pay
which before could do so, which again will
reduce the output of gold. But any such influence
as this, decreasing the annual production of gold,
can only produce a minute difference in the
aggregate quantity of gold, and could only
produce a perceptible effect on the price-level
after a long time. The actual demand for gold,
outside of a backing for credit money, is now not
great. It is really rather a useless metal at its
price. This change of ratio between the values
of gold and goods in itself could produce no
automatic regulating effect in a self-contained
community, since gold hardly enters into the
category of commodities most people buy in order
to be able to live. But, of course, the rise of prices
swindles all creditors for the benefit of debtors.

The effect of the gold-standard, however,

72 THE ROLE OF MONEY

is to make gold international money. Since
money is a debt only on that community of which
it is the legal tender for the settlement of debts,
and not a debt in the least acknowledged by or
enforceable against any other country whatever,
international interindebtedness must be settled
by the transfer of actual goods or services from
the country owing to the country owed, in so
far as it is not of the nature of, or is converted
into, a permanent loan or investment, bearing
interest. Making legal tender convertible into
gold thus means that, when the prices of every-
thing else have risen and that of gold has not,
indebtedness to a country abroad is more cheaply
settled by shipping gold rather than other goods.
We have seen that the first stage results in a
permanent shortage of goods, through production
permanently lagging behind consumption. This
naturally creates a demand for goods, and goods
can now be bought abroad wherever they are cheap
and plentiful and paid for by shipping gold in
exchange, rather than other goods, since every-
thing else but gold has risen in price. Prices are
in terms of the depreciated currency in the home
market but at the old rate abroad. Hence the
gold stocks of the country are drained out in this
second stage, and under the system existing
before the War, when the public were entitled
to ask for gold in exchange for notes and cheques,
the ratio between " cash " and credit (total
deposits) at the banks was reduced ultimately

THE EVOLUTION OF MODERN MONEY 73

below the limit the banker considered essential
to his solvency.

3. The banker now decreases the quantity of
money in existence by not renewing his loans
so fast as they are repaid. These loans, contracted
in a period of rising prices, have now to be paid
back in a period of falling prices so that, through
the change in the purchasing power of money
and quite apart from the interest paid for the
loan, the goods and services that have to be given
up by the borrowers to obtain the money to repay
must always on the average be greater than those
obtained by them with the money they were
lent. Before any considerable proportion of these
loans can be paid it becomes impossible to obtain
the money, that is to sell goods, except at a
ruinous loss to the producers. Hence a number
of them are rendered bankrupt. Their collateral
is sold by the bank, or, if it will not now fetch
the amount to repay the loan, appropriated by
them. In this connection those borrowers who
have been most deserving, and whose assets
are therefore worth more than those who have
been less efficient and careful in the conduct
of their businesses, are those first victimized.
They are sold up and ruined when those whose
assets would not meet the claims of the bank
have a better chance to escape in the hope they
may be more worth selling up later.

How the Losses are Distributed. Under (i) the
money the banks create is paid for by the whole

74 THE ROLE OF MONEY

community by the loss of the purchasing power
of the pre-existing money. All contracts for future
periodic payments for services, such as wages,
salaries, interest, and rents, and those fixed by
law or custom, such as transport fares, postal
services, and professional fees, are vitiated to the
injury of those who receive money while those
who receive these services obtain an uncovenanted
benefit, exactly as if there had been a universal
shrinkage in weight of the pound, the volume of the
pint, or the length of the yard. This is the inflation
period in the only sense the term has any meaning,
namely the period when the worth of money
suffers debasement.

Under (2) there is a profound international
disturbance endangering the friendly relations
between nations which we still have to go into
at greater detail. Under (3) we have the defla-
tionary period, when the value of money is being
brought back to the value in gold it originally
had. There is general economic paralysis through
the efforts of the debtors to repay their debts
destroying the means of payment. In the whole
system the fundamental purpose of money has
been lost sight of. Instead of being a means
for enabling a community freely to forward goods
and services from the producer to the ultimate
consumer and user, the interests of the whole
community have been sacrificed to enable banks
to lend more money than exists in physical or
tangible form. There is not the slightest reason

THE EVOLUTION OF MODERN MONEY 75

why just as much should not so exist as the
economics of the country require, so long as it is
issued only when additional wealth is awaiting
sale. The situation has arisen through the failure
of the nation to exercise its prerogative over the
issue of money and through the banks' preference
for a method which avoids the issue of proper
national receipts, or anything at all in return,
to those who have given up goods and services
for the money. Nor is there the slightest reason
for the existence of banking at all as it has now
become, whatever may have been the case two
centuries ago. The public own the goods and
services the banker indents upon without furnish-
ing anything in return for the levy and they pay
for the private issue of money by being deprived
of the profits of the issue, as well as by the rise of
prices the incorrect mode of issuing it entails.

Fraudulent Monetary Terminology. The whole
terminology of the system is inverted. Thus
bank-credit, when the accounting is done in goods
and services rather than figures, should be bank-
debt, the debt of the banks to the community
for the goods and services the banks have levied
upon the nation by empowering impecunious
borrowers to obtain them without payment.
Again in the all-important cash to credit ratio,
which in different epochs has varied from fifteen
per cent to probably as low as seven per cent or
less, both terms are false. We may postpone the
consideration of the second, which is simply

76 THE ROLE OF MONEY

the sum of the current account and time
" deposits ", and is really the debt of the bank
to its depositors for money on demand and on
due notice. It is the public's credit and the
banks' debt. But as regards " cash ", as the
veriest tyro knows now, by far the greater part
even of this " cash " is now created by the Bank
of England, debts of the latter to the clearing
house banks being accounted as " cash ". We
may postpone also the nearer consideration of
this for later consideration. Under Government
protection this bank seems to think it a great
joke bamboozling the public.

The Gold Drain. The devices for tinkering
with the currency and making a minimum of
genuine national money the base for the support
of, probably, a ten- to twentyfold greater inverted
pyramid of the will-of-the-wisp magically appear-
ing and disappearing money called " bank-
credit ", and the method of regulation of the total
money in existence by the Bank of England,
were of a brutal and utterly callous character.
The drain of gold from the Bank of England
under (2) " automatically " resulted in a reduction
in the total quantity of money in existence ten
to twenty times the amount of gold removed.
For each shilling or two of gold money that left
the country without replacement i was destroyed
by the banks arbitrarily calling on their borrowers
to repay their loans as we have seen, an impossi-
bility. The invention of a new currency, as a

THE EVOLUTION OF MODERN MONEY 77

debt to the issuing bank which could never after
be repaid, because repayment destroyed the
currency and the means of payment, put the
whole wealth-producing system of the world
in pawn to the banker. Ever after the world was
in his absolute power.

The evils of genuine usury in the Middle
Ages, through the shortage of the precious metals
and insufficiency of the medium of exchange,
cried aloud to heaven for redress. But the genuine
usurer did at least give up what he lent and that
for which he received interest, whereas the banker
does not, but levies upon the goods and services
of the nation for what he pretends to lend and
upon which he receives interest. It is bad enough
to be put in the grip of the money-lender who
does lend his money, but it is a million times
worse to be in the grip of the pretended money-
lender who does not lend his own money
but creates it to lend and destroys the means of
repayment just as fast as the debtors succeed in
repaying it. This is a surrender of the powers
of life and death over the nation's economic
life into the hands of irresponsible impostors.

The Government's Connivance. That the
Government have always been a party to this
abrogation of their function was revealed in the
clearest manner at the outbreak of the War, when,
for the first time in history, the throttle-hold
of the banks on industry suddenly relaxed, and
the economic system was allowed to work all

78 THE ROLE OF MONEY

out on production for the purpose of war destruc-
tion. The engines of the money system were
quietly reversed before the first shot had been
fired. Nations engaged in a world struggle to
the death with other nations cannot afford to
remain paralysed in the spider's web of bank
finance. Then the banks were instructed to lend
without limit to finance the production of muni-
tions, and the Government undertook to print
and issue to them the well-known " Bradburies "
or National Treasury Notes, in denominations of
i and i os., as required to preserve their solvency
and the safe ten per cent cash to credit ratio,
irrespective of the amount of credit they issued.
The appalling rise of prices was of course attributed
by all the City gramophones to the floods of paper
money issued by the Government.

In this way, by the printing and issue of three
or four hundred millions of Treasury Notes,
the aggregate amount of money was increased
from some 1,200 millions in 1914 to some
2,700 millions in 1920, being more than doubled.
The value of i in goods fell to less than one-
half of what it would buy before the War. The
increase of the National Debt, due to the War,
some 8,000 millions, was for the most part
contracted in this debased money, and if the money
had been correctly issued the debt would not
have amounted to half this sum.

The Cunliffe Committee. But before the War
was even ended, the necessary cunning steps

THE EVOLUTION OF MODERN MONEY 79

had been taken to bind the nation in the spider's
web of bank finance again. The notorious
Cunliffe Committee was set up to advise on the
nation's monetary system when peace was restored.
It was composed, with the exception of one
academic orthodox economist like all the others
of that day still entirely uncritical of the honesty
of the banking profession entirely of the bankers
themselves, and of Treasury Officials working
hand in glove with them. It is significant of the
close relations between the Government and the
banking profession that several Treasury officials
have since left the Government to become bank
directors, including the one whose name the public
associated with the Treasury Note. The
Committee contained not a single representative
of the interests either of consumers or producers,
for whose benefit, and not for the benefit of the
banking profession or the Treasury, money really
exists. Nor did it contain a single monetary
reformer although, even then, Arthur Kitson
had been exposing the evils of the nation's
monetary system for over twenty years, and had
correctly predicted the inevitable consequences
of allowing the bankers to resume their control
over it.

The first recommendation of this Committee
was the early return to the gold-standard and, the
second, that the National Treasury Notes should
be retired and replaced by bank-notes. The
intended effect of the first was well within the

8o THE ROLE OF MONEY

understanding of the ordinary stock-exchange
dealer or estates steward, whose business it is
to know about these matters in their clients'
interests. It meant that the National Debt, the
overwhelming proportion of which was contracted
in a debased currency, should be repayable as
regards principal and interest in gold money
worth over twice as much. The French knew
all about this, and it is idle to pretend the British
experts did not. It was justified as " correcting "
the war inflation, when all the nations' pre-War
creditors had been swindled through the banks'
pretending to lend, and not lending but creating,
some fifteen hundred millions to finance
production. This would never have occurred at
all if the loans had been genuine loans, which at
the outbreak of the War there would not have
been the slightest difficulty in raising from the
public. This wrong the Cunliffe Committee
proposed to correct by a second and worse one,
the universal swindling of debtors in turn for
the benefit of the war-gorged creditors, since
debts and the interest on them are not really
paid in pounds but in the goods and service^ the
pounds will buy. But all this is now common
knowledge, and sordid beyond concealment.

Deflation. The Report of the Cunliffe
Committee was adopted and the Coalition
Government of 1920 started to put it into operation.
The ruinous deflation stage, No. (3) of the cycle,
plunged the whole nation into economic paralysis

THE EVOLUTION OF MODERN MONEY 8 1

from which it has hardly yet shown any signs
of recovering. Apart from the physical destruction
and loss of life and health among the actual
combatants during the War, and the financial
losses suffered by the purely rentier class through
the inflation, the country at the signing of peace
was in a condition of economic prosperity and
well-being through the temporary removal of
the stranglehold of money.

The most absurd propaganda now began in
the Press, the public being exhorted to produce
more and consume less one week, and the next,
to work short-time and share one's job with one's
pal. The banks began suddenly to contract
credits with the object of raising the value of
the money and lowering prices, quite undeterred
by the rising tide of bankruptcies and unemploy-
ment. But, though they found it easy enough
to produce universal ruin and misery, to lower
prices was not so easy, the country producing
and consuming less and less at the old price
with the smaller quantity of money in existence,
rather than the same as before at correspondingly
lower prices.

The main reason for this is that lowering of
prices means corresponding lowering of wages
and salaries, which is effectively resisted by
Trades and Professional Unions. The weaker
are driven to the wall and lose their employment,
so that they become a charge on the taxpayer,
while those that retain their employment

82 THE ROLE OF MONEY

correspondingly benefit by any lowering of
prices that may be forced. In fact the brutal
methods of the gold-standard were too hope-
lessly out-of-date to reduce the price-level
effectively after the War. Its principles were
then quite as well understood by the economic
advisers of industrial employers and of Labour
as by the financial hierarchy. Moreover,
in an age of abundance such as science has
inaugurated, it is no longer possible to use the
naked weapon of starvation to reduce recalcitrant
workers to a lower standard of living as it was
a century ago. Nor is it possible to expect business
men to engage in production when they are told
that, before their product comes on the market,
prices will have fallen below what the product
costs to make !

The Return to Gold. But by 1925 it was
considered that the deflation policy had succeeded
in its object sufficiently to risk the gold-standard
being restored, as regards the foreign exchanges.
The Gold Standard Act, 1925, made it possible
to buy whole bars of gold of some four hundred
Troy ounces weight at the pre-War price of gold.
This openly gave a bounty to importers of goods
from abroad, inviting them to use our stock of
gold, with which they were provided at far
below its market price, to export in exchange
for foreign goods to compete against those in
the home market. The costs of home producers
were of course incurred in the still depreciated

THE EVOLUTION OF MODERN MONEY 83

internal currency, whereas those of the foreigners
were paid in gold units of much superior pur-
chasing power. It was probably a desperate last
effort of the bankers to break down the resistance
to their policy of lowering prices, by subjecting
the home market to bounty-aided foreign com-
petition, but it could not and did not last long.

True-Blue Treason. The second recommenda-
tion of the Cunliffe Committee was carried out
by the 1928 Currency and Bank Notes Act of
the last Conservative Government. This, as will
appear, fundamental change of the British
Constitution was not made in any way a political
issue. The Government as the true-blue upholders
of the King and Constitution quietly, and with
the minimum of fuss, authorized the retiral of
the National Treasury notes bearing the King's
head and the substitution for them of bank-
notes bearing the Bank of England's Promise
to Pay. At best this promise could have very
little meaning, but it was rendered entirely
bogus when the Coalition Government of 1931
went off the gold-standard ! The decision to
do this was all the more surprising inasmuch
as the ostensible reason of the Coalition Govern-
ment was to prevent such a " calamity " from over-
taking the nation. That, at least, was the reason
given during an election campaign based even
less on truth and reality than is now customary.

The 1928 Act. The 1928 Act, " deeming "
the Treasury Notes to be bank-notes, made

84 THE ROLE OF MONEY

provision for their replacement by a " fiduciary "
issue of 260 millions of Bank of England Notes
above the gold reserve, with provision for the
increase or decrease of this issue by consultation
between the Bank and the Treasury, it being
subsequently increased by 15 millions when the
gold-standard was abandoned in 1931. Much is
said in this Act about the purely nominal liability
of the Bank for this issue and little about the
profits of the issue, but it seems clear that the
net profits, as agreed between the Bank and
the Treasury, are handed over to the nation.
This is the sprat to catch a mackerel, as we
shall see in the next chapter, when we deal
with the immediate sequel. For in 1932, on the
base of the 15 millions increase, the banking
interests were able to increase their holding of
the nation's marketable securities, or of interest-
bearing " loans ", by a cool 300 millions. The
1928 Act marks a second fundamental step in
the evolution of privately issued currency,
the first of which was taken when the early
goldsmiths found it " safe " (for them) to
issue bank-notes, or promises-to-pay gold on
demand many times in excess of the gold they
possessed. These recent rapid changes have much
clarified the real issue at stake and made it possible
to bring it home to the nation beyond the pos-
sibility of its being misrepresented.

What is Genuine Money To-day ? It has been
necessary in this chapter to go in some detail

THE EVOLUTION OF MODERN MONEY 85

into the kaleidoscopic changes which the empirical
body of rules that does duty as our monetary
system has undergone since the outbreak of the
War, though much of it is familiar to the ordinary
reader. But this history has involved deferring
to the next chapter some of the more interesting
and crucial considerations that underly these
changes. Money under the existing situation
has no longer the remotest resemblance to what
it has ever been before. All the former ideas
about good money and bad, about genuine money
issued by the State and the private money put
into circulation by the counterfeiter, about the
duty of the State to protect the owners of money
from its being maliciously tampered with and its
value in goods debased, have now gone overboard.
We are in an age of " monetary policy " when the
value of it is continually altered, by the means
well known to the banking profession, to make
it worth less or more, thus to raise the price-
level or to lower it. To stabilize its value is
quite impossible without utterly destroying the
pretences upon which the banking system has
battened, whereas, if these were put a stop to,
its value would again be just as stable as it used
to be. In all this there is not given a moment's
consideration to the most elementary principles
of justice to the owners of money, who give
up for it valuable goods and services and have
a right to receive again value equivalent to that
which they have given up.

CHAPTER IV
MONEY AS IT NOW IS

MONETARY Illusions. The advantage of
* *** money in use, that it enables all economic
values to be expressed in terms of a common
unit, is one of the greatest disadvantages in
understanding its real nature. All economic
transactions with which the ordinary citizen
is concerned are always first translated into
and accounted for in money units. Indeed,
money units are often used without any qualifica-
tion both for money and for such forms of
property or debts as are easily convertible into
money. The definition of money in this book is
that it is the debt to the owner for a certain
value of marketable property obtainable on demand
in the country in which the money is legal tender
for payment of debt. It is because ordinary
citizens are never a consenting party to the
initial exchange which creates money in the
first instance that they have failed to see its vital
national importance. All debts being contracted
and expressed in money units they do not under-
stand the significance of the debt-credit relation
by which money itself comes into existence.
The " credit of the nation " is not merely its
power of running into debt for money to its
individual citizens, but includes also its power

86

MONEY AS IT NOW IS 87

of running into debt to its individual citizens
for actual goods and services whereby money
itself originates. The fact that the debt owed
to the citizens by the nation is in goods and
services and not in money does not alter the sign
of the transaction. It appears to do so only
because the vendors receiving new money for
wealth given up consider themselves paid, whereas
they are not paid but owed.

All money given up by individual citizens to
the nation in exchange for National Debt securities
belongs as a matter of course to the nation that
incurs the debt, whereas the goods and services
given up by them in exchange for paper and
credit money created by banks was accounted
by our monetary system, up to the 1928 Act,
as belonging to the issuer of the money. The
extraordinary thing is that one would search in
vain for any law sanctioning this accountancy
as regards the major part, namely that issued
as bank-credit.

A Distinction without a Difference. It will of
course be objected that the banks do not and never
have claimed permanent ownership of the money
they issue. But in practical economics there is
no longer any important distinction in this
connection between a capital sum of money and
the revenue it yields. The owner of a National
Debt security is really the owner of the annual
revenue it yields. If this is 100 a year and the
interest is four per cent it is exchangeable for

88 THE ROLE OF MONEY

around 2,500, ^ fi ye P er cent f r j(X ooo > an d so
on. To be in permanent enjoyment of the
annual revenue is in practice the same as being
the owner of the capital sum. So it is with the
2,000 millions or so created by bank-credit
which yields to the banks an annual revenue at
a bank rate of five per cent of 100 millions
a year. Of this they have been in enjoyment
ever since they issued the money and they still
show no disposition voluntarily to surrender it
to the nation. It is a quibble therefore to argue
that they do not own the money they have created.
If it were replaced by State money the State
also could choose whether it received the capital
sum, or lent it out and derived the interest from
it whether it incurred with it 2,000 millions
of new expenditure, or whether it knocked this
sum off the National Debt and saved the tax-
payer 100 millions a year. These are only two
of the many similar ways the nation would be
the richer for accounting the goods and services
given up by its citizens for money as the property
of the nation rather than of the banks.

To terminate such a situation as now exists
all that is required is for the public to look at
money, not as it has so sedulously been instructed
from the standpoint of the issuer who receives
goods and services for it gratis, but from the
standpoint of the user who has first to give them
up for money before he can get them again. The
accounting must begin one stage earlier than

MONEY AS IT NOW IS 89

money to cover the transaction by which the
money originated. If this is done the claim of
the banks that they are using their own credit
and not that of the community cannot be
substantiated. It is true the early bankers thought
they were, and no doubt they originally were
when they lent part of their depositors' gold.
At that epoch the credit of the goldsmiths stood
higher than that of the government, which thought
fit, when in need, to appropriate the merchants'
stores of gold in the Tower without the formality
of the owners' consent, and thus drove the latter
to seek a safer " bank ".

The Vested Interest in Creating Money. But
when they began lending not gold but promises-
to-pay gold or, later, under the cheque system,
cheques, which are claims on the bank for money,
the banks began to appropriate a credit that was
not their own but belonged to the community
which had to give up the equivalent goods and
services to those to whom the banks extended
the " credit " in the first instance. Now the
argument has come round full circle. The
invention of credit money enabled the banking
profession to appropriate as its own that part of
the credit of the community which has been
termed the Virtual Wealth, and this, involving
as it does the power of creating money out of
nothing, could not help proving a most extra-
ordinarily profitable business which has now
become a gigantic vested interest.

90 THE ROLE OF MONEY

Writers on money, from the conventional or
issuers' standpoint, now argue, for example,
that the banks are within their rights in times
of economic depression, when no one wants to
borrow their money at any price, and they have
more " cash " than corresponds with the ten
per cent safe ratio to their total deposits, if they buy
property belonging to the public with the money
that they issue, a transaction scarcely distinguish-
able from the operations of the counterfeiter.
This is called " Open market operations "
and, true to banking phraseology, this method
of acquiring the nation's valuable marketable
securities by the issue of new money is still
technically called a " loan ", rather than a theft.

Open Market Operations. When an ordinary
citizen buys securities his stock of money is
decreased, but with the banker it works exactly
the other way. He increases the quantity of the
money he issues by buying just as by lending.
He destroys it again by selling just as by calling
in a loan. To make this at all intelligible to
ordinary citizens they must look at it in this way.
The banking system is now a corporation which
has a vested interest in the issue of some nine
times as much money as it holds " cash ", and if
credit-worthy borrowers have not yet recovered
sufficiently from being caught in the trap of
deflation, and are unable or unwilling to borrow
this issue from them, then the banks are within
their rights in buying for themselves on the open

MONEY AS IT NOW IS 91

market revenue-producing investments, paying
for them by their own cheques. These the
vendors pay into their respective banks creating
deposits there, until the safe ratio of cash to
deposits is reached.

Cash (/). But what now is " cash " ? In
banking parlance " cash " is legal tender money
plus credits at the Bank of England. Let us see
how this worked out in 1932, just after we went
off the gold-standard and the " monetary policy "
was directed to raise prices and make the value
of everybody's money worth less in goods, so
repudiating part of the nation's debt in goods
and services to the owners of the money. It began
by the Treasury arranging with the Bank of
England and authorizing them to issue 15
millions more of their Promise to Pay notes,
under the 1928 Act. The net profit of this issue,
whatever it may have been, the Treasury
presumably was paid, and to this extent the
taxpayer benefited. Then the Bank of England
increased its " loans " (banking phraseology)
by acquiring for itself 32 millions of marketable
securities from the nation, and came into the
enjoyment of the revenue of interest which they
yield, paying for them by cheques. Whether or
not the old lady who overdrew her account and
sent the banker a cheque for the amount is an
invention, there is not the slightest doubt about
this being the normal, natural, and regular method
of the Old Lady of Threadneedle Street.

92 THE ROLE OF MONEY

The sellers of these securities in due course
paid these cheques into their banks, and the latter
returned them to the Bank of England thus
increasing their credits at the Bank of England,
which rank as " cash ", by 32 millions. This
great accession of " cash " enabled them to
increase their " loans " by approximately ^267
millions, much of the increase probably being due
in the still parlous condition of credit-worthy
borrowers as yet insufficiently recovered from
being deflated to " open market operations ".
So that, between February, 1932, and February,
1933, they were able to show an increase in their
" deposits " of nearly 300 millions. After that
it became rather ruinous to go to Switzerland
for one's holiday, or to any other country on the
gold-standard, owing to the " exchange " being
against us. At the time of writing (1934) the
pound in countries still on the gold-standard is
worth about 12$. But the banks between them
" acquired " some 300 millions of the nation's
revenue-producing securities or the equivalent
revenue from their borrowers in so far as they
may have succeeded in really lending the new
money they issued in the first year after going
off the gold-standard.

Banks now Create Money to Spend Themselves.
This surely disposes of the last vestige even of
the excuse that the banks in " assisting " industry
by fictitious loans are a public service, for having,
by deflation and suddenly withdrawing their

MONEY AS IT NOW IS 93

" assistance ", put the nation's industries hors
de combat, in order to reinflate the monetary
concertina, there being now nobody else to
" assist ", they have to fall back on assisting
themselves. The banking system is in fact now
nothing but a gigantic vested interest in the
actual issue of new money by methods which
still evade the law and ruin first creditors and then
debtors. By the ordinary canons of commercial
morality there is not a shred of difference between
creating money to lend to others for interest
and creating it to spend oneself, and now none
is recognized either in banking morality. All of
this was of course accompanied by the usual
dishonest propaganda intended to distract
attention from what was taking place. Newspapers
called attention to the abundant credit facilities
lying idle and no borrowers, and pointed the
finger of scorn at those who imagined that shortage
of money could have anything whatever to do
with the slump !

The Banker as Taxgatherer. The 1928 Cur-
rency and Bank Notes Act, as indicated in the last
chapter, has, beyond all doubt since the country
has gone off the gold-standard, introduced a
new principle into the British Constitution.
Before, the issue of bank-notes was strictly
regulated by law, but as regards the profits of
the issue the nation made no claim to them.
So long as they were convertible into gold, the
banker made himself liable for the issue though

94 THE ROLE OF MONEY

he gave no security whatever for his solvency.
Notwithstanding the fact that, stopped by the
law from issuing notes, he began to lend cheque-
books to such an extent that it soon became
physically impossible for him to fulfil his bond,
and that any attempt to make him do so on the
part of a small section of the public would have
plunged the nation into a financial panic,
mercantile custom, if not the law, still maintained
the fiction that the banker was trading with
and using his own credit.

The 1928 Act, which authorized the issue of
bank-notes by the Bank of England to replace
the National Treasury Notes, laid it down that
the profits of the issue should be paid to the
Treasury. As we have seen, the issue of any
form of credit money is a forced levy or tax on
the goods and services of the community which
it is impossible for the community to resist or
escape. Parliament alone has the right to authorize
and impose taxation, and this Act enables the
whole constitutional position to be challenged.
For as regards the relatively insignificant issue
of notes, Parliament has delegated its powers
to the Bank of England, which in this respect
is the authorized but unofficial taxgatherer of
the Government. For surely, even in law, it is
not possible to maintain that a tax is only a tax
when the levy is paid in money tokens, and that
a levy paid directly in valuables is not a tax.
For this would be as silly as arguing that a person

MONEY AS IT NOW IS 95

giving up money establishes a credit, but one
giving up goods and services of equal value
for money does not.

Even in 1928 the foregoing was true for all
the ordinary citizens, though the 1925 Act had
given money a limited degree of convertibility
into gold for the benefit of the foreign trader.
This, however, was removed in 1931. Thus we
have by Act of Parliament the King's head
removed from the nation's money and in its
place a bank's Promise to Pay substituted. Now
this " Promise to Pay " dates from the days
when the bank-note was at once the receipt for
gold voluntarily given up to the bank by its
owner, and its promise to repay it on demand.
By making the Bank of England's Promise-to-
Pay notes legal tender in place of the National
Treasury Notes, the promise is become a bogus
promise. The bank-note is now only the authorized
but unofficial receipt for a national tax collected
on behalf of the Treasury by the Bank of England.
The promise of the Bank of England can be
shown to be bogus by anyone who cares to take
some of these i notes to the Bank and demanding
that they redeem their promise to pay "pounds "
in exchange for them. It is time this lying legend
was replaced by the true one " Received Value
worth i ", and it is time this sinister delegation
of the powers of taxation to the Bank of
England by Parliament was challenged and
reversed, and the note signed by the Treasury

96 THE ROLE OF MONEY

authority responsible, as the original Treasury
Notes were.

The Sprat to Catch a Mackerel. But as already
indicated this is not the real issue at all, which
is the right of the banks by a book-keeping trick
to create twenty or so times as much money as
the amount for which legal tender receipts are
issued. So long as physical tokens exist it is not
possible to make them less than zero. But by
book-keeping this obvious limitation can be got
round, and in figures it is just as easy to count
in negative numbers as in positive, and there is,
then, no fixed number, such as zero, from which
the counting starts. Money accountancy should
start from the zero of no money. The real quantity
of money is perfectly definite, for it is, in units
of money, the worth of the real things the
aggregate citizens are owed and entitled to receive
on demand in exchange for the money. The fiction
that only legal tender is " really " money,
and that cheque accounts are not money but
claims on demand to be paid money, does not
in the least affect the quantity of goods the
citizens have given up for it and are owed on
demand. The cheque system preserves the
zero of no money for legal tender or physical
tokens, but extends the accountancy to an
indefinite and continually varying extent below
zero into the region of minus quantities, or debts
of the banks for non-existent money. Making
banks keep pound for pound of national money

MONEY AS IT NOW IS 97

tokens against their liabilities to their current
account holders would at once stop this fraudulent
accountancy.

Banks Give no Security Whatever. It is the
strangest perversion of common justice that
whereas the banks' borrowers have to deposit
with the banks valuable securities, in the way
of the title deeds to houses, farms, factories,
or investments, amply sufficient to cover the
eventuality of their default, the banks, trusting
no one, themselves give no security whatever
of any kind to their depositors. In the one case,
when it becomes impossible for the creditors
to fulfil their bond they are sold up and bank-
rupted. In the other case the banks are granted
a moratorium and sufficient national money
is then printed to enable them to avoid ruin.
The pound for pound of national money would
be the nation's security for their solvency and it
could be issued to them as required, against
suitable collateral security in the way of the
banks' assets to cover the loan. But as a matter
of fact the mere substitution of a national money
for the present fraudulent private money system
would produce such an almost instantaneous
increase in real national prosperity that it would
not be long before industry and agriculture got
out of debt to the banks and were able to create
and accumulate their own capital without the
aid, for the most part, of either genuine or
fictitious loans.

go THE ROLE OF MONEY

The Time-Element of Money. The philosophy
of money here expounded, regarded in a strictly
scientific light, may be said to put the difference
between barter and monetary systems in the
time-interval, that distinguishes the latter from
the former, between the giving up of one kind of
property and its repayment by another. Money
may be considered intermediate repayment, but
this does not quite cover the point, which is
essentially one of time. If, in scientific fashion,
we imagine the time-interval continuously reduced
to zero, from a monetary system we arrive at a
barter system, and the point is that this is not
possible. If we make the mistake of supposing
it to be so, it would be the same as supposing
a community exchanging by barter in which as
soon as one kind of produce were ready for use
or consumption an exactly equivalent worth
automatically appeared in the same place and at
the same time of the kind the producer wanted
in exchange. Whereas, as we know, there are
such considerations as seed-time and harvest in
the case of agricultural produce and their equiva-
lents in industrial production, as well as that the
producer never knows accurately what his needs
will be in the interval between them. Money
bridges this gap because it gives the means of
obtaining continuously what is needed for use and
consumption, irrespective of the spasmodic nature
of production, or, by custom, of payment (wages,
salaries, dividends) for engaging in production.

MONEY AS IT NOW IS 99

The Circulation of Money. Orthodox econo-
mists seem to ignore the technical and biological
processes for the creation of wealth, and the
principles regulating its consumption and use,
in their almost exclusive concern with the entirely
subordinate function of exchange or commerce,
against which Ruskin in his day railed in vain.
Here, as he expressed it, " for every plus there
is a minus ", one party to the exchange merely
giving up what the other gets. They tried in the
so-called " quantity theory of money " to make
the exchange value of money depend inversely
on its quantity " in circulation " and directly
on its " velocity of circulation ". Their attempts
to determine the first came up against the almost
insuperable difficulty in a privately-issued money
system of being sure exactly what the quantity
in existence at any instant might be, let alone
the quantity " in circulation ", and they were
dependent for this on such figures as the banking
profession might wish the public to believe,
besides unintelligently following the bankers' own
methods of arriving at the information. These
appear to be radically at fault, as still to be gone
into, in slumping together current account and
time-deposits, and slurring over the distinction
between them. As regards the second, they
seem to ignore the time-factors in production
which it is the function of money to bridge, and
they wrote as if it were the velocity of circulation
of money which determined the rate of creation

100 THE ROLE OF MONEY

of wealth rather than the latter being the essential
factor to which the circulation of money must
conform. The mere fact of money changing
hands, altering from moment to moment the
identity of the individuals with money and without
goods or with goods and without money
commerce in brief, including in the term all
stock exchange, real estate, and other transactions
involving the exchange of finished property
is not circulation at all. That term should be
confined to the payments as above for engaging
in production, the return to the production
system of the money so paid out, in exchange
for the product, and its passage through the
production system until it is paid out again and
the circle completed.

It is not necessary to consider this old " quantity
theory " of money farther than this, because
enough has been said to show that it is really
a fraud. In practice neither of the two factors
supposed to determine the exchange value of
money were known, but only their product,
and this by definition was simply the total money
exchanged for goods per year, or " the volume
of trade ". Dividing, in this, the quantity of
money by the quantity of goods gives the average
price of goods, or the price index, a purely
statistical figure which is not dependent on any
theory at all. It may be stated at once that no
quantitative theory of the value of money can
possibly apply when the quantity of money in

MONEY AS IT NOW IS IOI

existence is being arbitrarily varied, created
possibly to allow people to gamble with on
margins in the Stock Exchange, possibly with-
drawn from production for the purpose, and again
possibly not. It is like taking seriously a set of
statistical figures over a period, in which the units of
reckoning were never the same from one moment
to the next, or a set of measurements with some-
one arbitrarily altering the calibration of the
measuring instruments to make them always
read wrong.

The Value of Money or Price-Level. By regard-
ing money as essentially credit in the first instance,
the quantity of money is simply the quantity of
goods and services with which its owners are
credited, that is voluntarily going without, and
that we call the Virtual Wealth of the community.
Itself it is a quantity, not a rate like the volume
of trade, and, without any complication at all,
the exchange value of money is the Virtual
Wealth divided by the quantity of money, and
the price index or price-level is proportional
to the reciprocal of this. It can only change (i)
by virtue of there being more or less money in
existence or (2) by virtue of the community, in
the sense of the aggregate of its individual
members, electing to go without and be credited
with less or more goods. The first is the physical
quantity and the second the psychical quantity.
The latter depends on the number of individuals
in the community and on their business and

102 THE ROLE OF MONEY

domestic habits and customs, which are conserva-
tive. It is inconceivable, if the quantity of money
were reasonably constant, that the Virtual Wealth
could be subject to any violent change whatever,
except by some far-reaching natural or human
cataclysm. In so far as the quantity of money
in existence violently and suddenly changes,
it produces violent repercussions on the standard
of living and general prosperity, and upon the
amount of goods and services people can afford
to abstain from. But since the cause of this is
purely external, arbitrary, and preventable, there
seems no reason for discussing it and so
over-elaborating the simple conception given here.
It is rather the purpose of this book to apply it
to a genuine money system using physical tokens
regulated in amount to keep the price-level
constant.

Some Monetary Factors. But to bring the
conception into simple relation with the time-
interval which it is the function of money to
bridge, between the giving up of one kind of
property and its repayment by another, it is
necessary to know, besides the quantity of money,
only the " volume of trade " or total money
exchanged in the year for goods. If we call this
{y and the total quantity of money Q, then
Q\V is the time-interval required, namely the
average time each unit of money is kept before
it is spent. Let us suppose the volume of trade,
in the sense defined, is taken as given sufficiently

MONEY AS IT NOW IS 103

accurately by the amount of bills, cheques, etc.,
annually cleared by the Bankers' Clearing Houses.
This was in 1928 44,200 millions. The quantity
of money in current accounts in these banks for
that year is stated to have been 1,026 millions.
Hence so far as this part of the money is concerned
the average time-interval between spending is
rather more than one forty-fourth of a year,
or eight days eight hours. Probably something
like this period is true for money in general over
the whole cycle of production and consumption.
What it may be for each half separately can only
be guessed. The time of one complete circulation
is the product of this average interval and the
number of exchanges in both halves. If it is
correct that the national income was then about
^4,000 millions the average number of exchanges
in the complete circulation is about a dozen.

In any case it is important to notice that this
interval is a derived or secondary quantity, not
in itself as informing as the fundamental concep-
tion of Virtual Wealth. The latter is measured
by the quantity of money in existence divided
by the price index, and this again, divided by
the population, gives the average quantity of
wealth (in money units reduced to the price-
level taken as standard) which each individual
of the community is voluntarily preferring to
go without in order to own money. If the value
of money in 1914 is taken as the standard (price-
level = 100), it was in that year a little over 20

104 THE ROLE OF MONEY

worth, and the quantity of goods and services
this represents probably varies comparatively
little however the price index may vary.

These figures, though they are only given
as rough indications of the orders of the quantities
in question, appear to be very much as might have
been guessed from other considerations.

A Grain Currency. Man does not live by bread
alone even in an economic sense, but let us suppose
for simplicity that he does, and consider a self-
contained community producing and consuming
its own grain, harvested, say, in September, and
call the harvest H in worth of money units
of constant purchasing power. Then, neglecting
the complication of the relatively small amount
of grain that has to be always reserved for next
year's sowing, and assuming consumption to be
at a uniform rate, the quantity of grain always
in existence as a minimum must be FH where F
is the fraction of the year still to run before
harvest. Thus F is o just before and i just
after harvest, in March |, in June J, and
so on. Now suppose a simple money system
to distribute this harvest in which the government
issues H units of money to buy it in September,
and sells it again throughout the year. Then,
just before harvest, the community have no
money and no grain, just after reaping, H of
grain and no money, and, just after selling it,
H of money and no grain. This well illustrates
the spasmodic character of production which it is

MONEY AS IT NOW IS 105

one of the functions of money to bridge. By March
the government have | H both of money and of
grain, and the community -| H of money,
by June the government have f H in money and
J H grain and the community J H of money,
and so on, the quantity of money in the pockets
of the community always equalling in value the
stock of grain in the government's granary.
Note, especially, that the government has only
to issue H units of money once, not every harvest !
It is of interest that something like this simple
system exists as regards the distribution of grain
in Latvia, the issue, called Treasury Notes,
being 104 million Lats (i Lat = i Swiss franc,
now about fifteen to the pound) and the other
money being about thirty-six millions of paper
and coin and fifty-seven millions " bank credit ",
with a gold base of forty-six millions, in Lats. How
infinitely better this is than when the government
does not issue money and the producers before
harvest are always in debt for some part if not
the whole of the harvest which when reaped
repays their debt, and leaves them again in debt
during the whole or part of the period before the
next. The essential physical fact is that there
must always be FH of grain in existence, or
the community will go short or starve before the
next harvest, and that fact is not altered by bank
finance, the sole social purpose of which is to
keep the producers of wealth in debt so as to
ensure that they work hard to repay it and do not

106 THE ROLE OF MONEY

slack. That may or may not be an economic
necessity but, if so, they should be in debt to
themselves, and that is what money really is
and what it does, whoever issues it.

Economizing in the Use of Money now Fallacious.
It is the irony of the situation that the methods
invented by the old banker to " economize in
the use of gold for currency ", by creating money
without any gold, ought now to be used by the
State to economize in the need for the banker (in
the modern sense of minter) if the State is to
continue to exist except as the perquisite of the
minting profession. The idea of economizing
in the use of currency dates from the days when
it needed a long and precarious search for the
precious metals costing on the average probably
much more than they were worth. The very
opposite obtains now that we understand that
gold and silver money only embody in a crude
and elementary form the principle of Virtual
Wealth. Money is a debt owed the owner
by the community. The issuer of money fades
out of the picture with the goods and services
he obtains for nothing by the issue and, much
as he may pretend he is liable for the issue and
the repayment of the debt, the debt is never and
never can be repaid, but in a scientific age goes
on increasing and circulating through the
community, exchanging their goods and services
for ever after.

We may still learn much from the foregoing

MONEY AS IT NOW IS 1 07

illustration as to the nature of any money system.
As regards the point that there is always just
as much wheat in the state granaries as there is
money in the pockets of consumers, many mone-
tary reformers have averred as a self-evident
proposition that there always ought to be as
much money in existence as there exist goods
and services awaiting sale, and we shall have to
comment on this proposition later. But first
notice that, on the average, one-half of the grain
money, rising from zero after harvest to H just
before the next, is always lying in the govern-
ment's coffers, " idle and barren " as the old
bankers would have bemoaned, but really for
the simple reason that there is then no grain to be
had in exchange for it.

Money Tokens or Book Credit ? Now, so far as
concerns a state service of this character, it is
clear that the government instead of keeping the
money returned to them during the year might
as well burn it as received, to avoid the risk of
loss during keeping, and issue a new lot every
autumn. Or, in terms of book-keeping instead of
counters, it could issue a credit of H to the
producers for their harvest, and, as the grain
is bought back from them, cancel the credit.
This involves a new issue of credit every harvest
and its destruction throughout the year instead of
a single issue of permanent money once for all.
In this particular instance the credit accountancy
is even truer to physical reality than the

I08 THE ROLE OF MONEY

since the credits correspond always to the
unconsumed grain and there is no money lying
" idle and barren ". But it is absolutely essential
to notice that, if the grain were not in effect a
government monopoly but was being bought by
wholesalers in the ordinary way of business in
an individualistic society, they could not afford
to cancel the credits as they resold their grain,
for the simple reason that they have not the power
to re-create them next harvest. That is possible
only for a government conducting the marketing.
It is possible for banks because they usurp the
prerogative of governments in issuing and
destroying the credit of the community for goods
and services given up by them. The usurpers
charge interest for getting people into their
debt, whereas all democratic governments would
issue money to keep people out of their debt if
they knew the elementary rudiments of their
trade.

These remarks may also serve to illustrate
the different starting points of two schools of
monetary reformers ; those who want genuine
permanent national money issued by the state
after the increase of production is ready for
distribution, solely according to statistical regula-
tion, to maintain the price-level constant, without
any other let or hindrance whatever ; and those
who look rather to a modification and extension
of the system of issuing ad hoc credits for definite
production purposes, the credits being destroyed

MONEY AS IT NOW IS 1 09

and re-created again at each round of the cycle
of production and consumption.

The reasons why the former system is preferred
in this book are many, but the primary reason
is that a system that must use some form of
physical counters is so much less easy to falsify
than one of book-keeping. Also, as already
indicated, until some such open and unobjection-
able system is reverted to, and full statistical
experience of it made known, there are many
simple questions, such as the correct quantity
of money for a given rate of production and
consumption, that cannot really be answered
definitely, and which, indeed, it seems to be the
object of the present system to make unanswer-
able. Men do not live by bread alone, even in
the economic sense, and in modern industrialized
communities at least, but also to an increasing
extent in modernized agriculture, there is a
fairly constant flow throughout the year, through
the whole cycle of production and consumption,
of payments for raw materials, intermediate
products, and services in production, balanced
by equal payments for the finished products
or for reinvestment. Even though production
as in the illustration be spasmodic, men do not
live by fits and starts. Though in the initial
days of credit money, one of its functions was to
facilitate the increase of production, now it is
the other way and the problem is to distribute all
that men are already able to produce.

110 THE ROLE OF MONEY

these circumstances particularly there seems no
reason at all why money should not be permanent
and physical, thus avoiding the risk of dishonest
accountancy that can so easily occur where money
is being continually destroyed and re-created.

Should Money Lending now be Permitted?
The next point of interest is that, though the
Government, when it receives back the money,
cannot use it to buy grain because there is then
no grain to buy, there is nothing to prevent
the producer, when he receives it at the harvesting,
from lending part of it at interest for part of the
year to someone else, who would not borrow
were he not desirous of spending. Confining the
consideration still to money issued in a self-
contained community for the purpose of marketing
a single commodity, grain, it is equally clear
that the only grain the borrower can buy is that
which the lender will himself require later on in
the year, and if the borrower consumes it, so
that it may not " lie idle in the granary ", the
lender cannot get it back when he wants it. All of
these simple considerations may serve to raise
the broad question of the physics, if not the
ethics, of money-lending in general, in contra-
distinction to genuine investment, when the
investor in effect spends his money and can only
get it back by finding someone else willing to
buy his investment from him. There is a growing
school of sociological thought, following the best
traditions of medievalism, against money-lending

MONEY AS IT NOW IS III

as such, in which the lender takes no risk, as he
does when he sinks his money in a genuine
enterprise with the success or failure of which
his own fortune is bound up.

The more one thinks over it the more it seems
as though even genuine money-lending, pure
and simple, however essential it may be to
preserve it in the transitional stage to the new
era in order to avoid too great and sudden
interference with commercial habits and ideas,
would even now under a properly worked pure
credit-money system be a retrograde redundance,
undoing with one hand what is done with the
other. Money is itself a debt of goods and services,
and outside of the question of securing specific
objects such as to enable an exceptionally enter-
prising and capable individual more quickly to
arrive at opportunities of social usefulness lend-
ing money is merely creating a new private money
debt between individuals which, if the physical
circumstances were such as to justify the creation
of the new debt, ought rather to be met by the
issue of new money. For no one borrows money
to hoard but only to be able to consume, normally,
of course, for the purpose of putting into pro-
duction new wealth which will only be ready for
consumption or use at a later date. A money
debt thus usually takes out of the market just
the same amount of finished wealth as if the owner
had himself spent his money and consumed
what it bought, while owing to the prevailing

112 THE ROLE OF MONEY

laxity in these matters he feels quite at liberty
to call in the loan and again consume what the
borrower has already consumed.

Physical Absurdity of Short Term Lending.
Whatever may be thought of loans of money for
definite long periods, covering the reproduction
of the wealth the borrower consumes, when he is
in a position to restore wealth to the system before
the original owner of the money recovers his
money and can take it out again from the system,
the practice of lending money on call or short
notice is physically idiotic and should be stopped.
It is merely a mathematical and not a physical
possibility, due to the variable minus quantity
from which the quantity of money is now reckoned,
which the use of physical counters would make
impossible. Because then it would not be
possible, as it is now, for the owner to recover
again his money without someone else giving
it up. Repayments must under such circum-
stances balance new lending, whereas it is not
too much to say that the very object of the
existing system is to escape this limitation imposed
by ordinary common sense.

Current Accounts and Time-Deposits. This may
serve to reintroduce the point deferred from
the last chapter as to the essential difference in
correct accountancy between current accounts
and time-deposits, which it has been the practice
of the banking system to slur over and slump
together. The sum of the two, or " total deposits ",

MONEY AS IT NOW IS 113

represents the money the bank owes their
depositors on demand or short notice. When
a client transfers money from a time-deposit to
a current account it makes no difference to the
" cash " to credit ratio, and it would appear
that some of the worst falsifications of the mone-
tary system arise from this quite unjustifiably
loose procedure. Although a time-deposit is
nominally only recoverable by the owner on due
notice, even the stipulated period is usually not
insisted upon. At the worst the bank would
merely charge a " discount " for refunding the
money without notice, unless itself in diffi-
culties.

Whereas it is clear that if a depositor is receiving
interest on his deposit from the bank, the bank
is only paying it because itself it has lent it to
some borrower, presumably at a higher rate
of interest. The money is no more in the bank's
possession than the gold belonging to the depositors
remained in the goldsmiths' safe when they
lent it out at interest. If money is defined as
the debt of goods and services owed the owner
of money on demand then, to arrive at the total
quantity of money in existence, we must not add
together the money in current accounts and
in time-deposits, but reckon the former only.
The money in the time-deposit has been lent
out by the bank, which is paying the owner
interest for doing so, and it either appears in
someone else's current account or time-deposit.

THE ROLE OF MONEY
If in the latter, then the same consideration
applies to the new as to the original time-deposit.
That is to say, in order to arrive at the total
money in existence only the current accounts
must be reckoned. This assumes, as is customary
in this sort of rough and ready reckoning, that the
money outside the banking system altogether,
in the hands of the public as physical tokens,
does not change, but it is in any case too small
a proportion of the whole seriously to invalidate
the conclusion.

How the Banker Avoids his Own Trap. It would
seem probable that it is by this method that the
truly frightening destruction of money that has
been going on since the deflation policy of
the Cunliffe Committee was started has been
concealed. By slumping together the two kinds,
the " Deposits " that alone are given in the
banks' balance-sheets do not appear greatly
diminished. Figures it is true have been published
latterly that would make it appear that the ratio
between current accounts and time-deposits has,
since 1919, only changed from the ratio 2 to i
then to i to i now. But they appear faked. So
far as their source can be traced they appear
to come from a table published in the Macmillan
Committee's Report. Certainly in 1922 the
statistician, H, W. Macrosty, complained that
these important figures were not published by the
British banking system, and he estimated the
ratio as then 5 to i, as for the eight hundred chief

MONEY AS IT NOW IS 115

banks of the Federal Bank System of the United
States.

However this may be, it would appear that
the present i to i ratio is the lowest it is possible
to bring it to. Since the banks dare not destroy
the money actually lent to them by their depositors,
or they would themselves be caught in the trap
which those to whom they have lent money are
caught in. These " time-deposits " can be
demanded by their owners at short notice, and
for a i to i ratio, since the money in current
accounts give the aggregate in existence, they
can, except by re-creating again the money
destroyed, only be paid by transferring the whole
of the money in existing current accounts into the
current accounts of the owners of the time-
deposits. The i to i ratio arrived at by deflation
means that the banks have left just enough
money in existence to meet this liability, and if
this interpretation of the situation is correct, then
it would appear that practically all the rest of
the money in existence has been destroyed in
their frenzied efforts " to crucify the country on
a cross of gold and glut ".

CHAPTER V

INTERNATIONAL ECONOMIC
RELATIONS.

Money Embroils the Nations. The system
that has grown up could not have survived
so long, or have remained so long camou-
flaged as the opposite of what it really is,
but for the complication introduced into the
problems by international economic transactions.
Viewed from the standpoint of a single self-
contained community, the gold-standard involves
an almost self-evident contradiction. It is a
system in which money was supposed to have
been kept of constant value with reference to
gold and in which the manner of issuing new
money was such that it necessarily reduces in
proportion the value of the rest. For since there
are no more goods and services on sale than
before the issue, what is on sale is divided among
more money units, so that each becomes worth
proportionally less, and the new issue merely
dilutes the value of the old. In practice, this
fundamental contradiction resolved itself into
its two parts or phases the inflationary period
when the price-level was being forced up by
new issues, and the deflationary period when it
was being forced down again by the destruction

116

INTERNATIONAL ECONOMIC RELATIONS 117

of money. The intermediate stage, the draining
of gold out of the country as the one type of
commodity arbitrarily prevented from rising in
price, so reducing the " cash to credit " ratio,
is the stage that brings in the international aspect
of money. Bad money at home embroils the
nation's affairs abroad.

International Banking. As the inevitable
inconsistency underlying their system became
familiar to the banking profession in different
countries, there grew up a corresponding system
of international banking, working hand in glove
with the internal banking systems, to the mutual
benefit and security of both. They thus extended
the area of their operations to that of the whole
civilized world, and made it much easier for them
to escape detection and punishment. Whereas
internal banking plays off in turn the debtor and
creditor classes within the community and keeps
them in perpetual strife and poverty, international
banking plays off the poorer country against the
richer and, by reducing the latter to the level of
the former, is the real agent fomenting and
perpetuating the aggressive nationalism out of
which international conflicts arise. Money, the
lenders say, must find its own level. In doing so
it drags down to the lowest level the standards of
living both of individuals and of nations.

In the inflationary stage, the export of goods
is rendered difficult and unprofitable, owing to
the high prices and the abundance of purchasing

Il8 THE ROLE OF MONEY

power in the home market. Whereas the import
of goods, to correct the shortage of finished wealth,
resulted from its having been handed over gratis to
producers to sink in future production, is favoured
because of the high prices in the home market,
and the possibility of obtaining from abroad
goods at the same price as before by the use
of gold. In the deflationary stage the opposite
obtains. The destruction of money and calling
in of loans curtails employment and reduces the
purchasing power of the community concurrently
with the arrival on the market of the abundance
of goods still in course of production, and there
is a catastrophic fall of prices. Import from abroad
is prevented and, instead, the goods that cannot
be sold at home through the destruction of the
medium of exchange are rushed to the ports for
shipment abroad at any price they will fetch.

Money at Call and Short Notice. In the first
stage, the banker's loans are in demand at home,
but in the second, having called in his internal
loans, he has lending power to lend, and his
revenue in the form of interest is drying up.
It is at this precise moment that the demand
arises for loans to finance the export trade. In
this situation, therefore, the business grew up of
lending money at call and on short notice to
the international bankers financing the shipment
of cargoes being exported and imported, on the
security of these cargoes. Clearly money created
for this sort of transaction, essentially transport,

INTERNATIONAL ECONOMIC RELATIONS 1 19

can be very much more quickly recalled and
destroyed than that sunk in production. By
dividing the business into long term lending,
and lending on call or short notice, and by
increasing the ratio of the first in the inflationary
period and of the second in the deflationary
period, the internal bankers contrived to extract
a more constant revenue by lending out the
Virtual Wealth of the community, which, as
regards the second source, they shared with
the international bankers. Of the main items in
a bank balance-sheet, on the assets side, " Money
at Call and Short Notice " and " Bills Discounted "
refer mainly to the international lending market,
" Advances, Loans, etc." to the internal loans,
and " Investments " to what the banks have
bought with the money they create for themselves
under open market operations.

How the International Banker Rules the World.
By alternately lending and withdrawing loans
at home and withdrawing and lending them
abroad, the internal and international bankers
played into each others' hands, keeping the whole
world in a continuous ferment, and internal
price-levels always on the move. But in this
sordid game the international banker soon learned
that he had the whip-hand, and could absolutely
control the situation and force the internal bankers
to follow his lead. For by lending at any time to
a country under circumstances which make it
more profitable for that country to take the loag.

120 THE ROLE OF MONEY

not in the form of goods but in gold, with which
to buy in a third country what the loan is really
required for, he could drain the gold out of each
country in turn. So he could enforce deflation
and a break of prices leading to prolonged
economic depression there, until its workers
were reduced to a more humble and less indepen-
dent frame of mind. The gold-standard became
not so much a device for forcing back, after
inflation, the monies of all countries adopting
it, and for maintaining their constant relative
exchange value, as one for forcing down wages
and prices in all countries to the level of the
poorest and most backward.

It will be the main purpose of this chapter to
try and clarify some of the excessively complicated
consequences of what is euphemistically termed
banking in the international sphere. From the
standpoint of the professional money-lender,
and from his alone, prosperity is a curse. His
trade is debt, his object its creation, and his
supremacy over the creators of wealth depends
on the trick that his loans being fictitious they
can never be repaid. National frontiers now alone
bar his world dominion, so that those too must
go down.

Money is National not International Debt. The
first consideration about international economic
transactions is that the money of any one country
only has meaning in that country in which it is
Jegal tender, or can be at demand converted

INTERNATIONAL ECONOMIC RELATIONS 121

into legal tender, for the payment of debts. It is
a debt of that country alone, or a claim on its
marts and not upon those of another nation.
For the exchange ratio to remain at any definite
figure without gold flowing from one country
to another, in each country the value of the sales
of its own money for the other country's money
must be always the same as the value of its sales
of the other country's money for its own money.
Thus if the par of exchange between England
and Germany was, as before the War, about
twenty marks to the pound, 100 can only be
changed for 2,000 marks if some one else wants
to change 2,000 marks for 100. If only 1,800
marks for 90 were offered, then the difference
10 can only be exchanged for marks by buying
200 marks with gold. Failing that, the 1,800
marks became worth 100 or the exchange falls
from 20 marks to 18 marks to the pound.

The second consideration has to do with the
exchange of goods. Here for the foreign exchange
ratio not to vary and gold not to flow, any excess
value of imports over exports must be balanced
by the country receiving the excess (i) owing
for them, that is contracting a new debt as regards
the rest of the world, or (2) being already owed
them and in receipt of interest payment or capital
repayment for debt contracted previously by
the rest of the world to it. If exports balance
imports (or in so far as this may be the case)
they are settled by the importer in each several

122 THE ROLE OF MONEY

:ountry paying the exporter of his own country
in his own currency. An elaborate system of " bills
3f exchange ", bill-brokers, accepting houses,
discount markets, etc., explained in technical
works on money, enables this to be done. The
technicalities, being concerned with the means
by which it is done rather than the actual purpose
achieved, need not here detain us.

In order to simplify the complicated question
of international economic transactions, the two
propositions will now be discussed more in detail.
It is only outside of these simplifying propositions
that complication arises. Both reduce the problem
to one as between a single country and the rest
of the world taken as a whole in order to avoid
having to consider the innumerable cases that
would arise if we considered all the countries
in pairs at a time, as of course applies to the
actual transactions. The discussion is concerned
to distinguish the type of transaction that has no
effect on the stability of the foreign exchanges
from those which disturb them.

Importers Pay Exporters of their Own Nation.
The second proposition is usually taken for
granted but it is well to state it precisely. It is
that in any country in so far as the value of its
imports is offset by the value of its exports,
in its dealings with all other countries for which
the same is true, the trade is really barter and
does not necessarily involve any exchange of the
monies of the countries at all. In each country

INTERNATIONAL ECONOMIC RELATIONS 123

the importer really pays the exporter in the money
of that country. The simplest case is when two
countries only are concerned, for example
Britain exporting herrings to the U.S.A. and
the U.S.A. exporting the equivalent value of
tractors to England. If the British importer of
tractors pays the British exporter of herrings
and the American importer of herrings pays the
American exporter of tractors, each in their
respective currencies, the accounts are squared.
The next most complicated case would be a
triangular one with, say, equivalent values of
herrings exported by Britain to Russia, of
platinum by Russia to the United States, and of
tractors by the latter to Britain. If we imagined
each importer remitting his own money in pay-
ment of the import, Britain would have Russian,
Russia would have American, and America would
have British money to exchange each for its own.
If one country, say Britain, took the initiative,
and sent its Russian money to Russia in exchange
for their American money, it could then send
the latter to America in exchange for British
money, and all would be satisfied. This is what in
effect is done under the bill-of-exchange system.
The bill-of-exchange is a sort of reversed cheque,
issued by the receiver of the money and endorsed
or accepted by the payer. It is in effect an I.O.U.
which is exactly of the same nature as cheque
money if immediately payable on demand (a
" sight-draft "). But usually it is payable within

124 THE ROLE OF MONEY

three or six months from acceptance. " Discount-
ing " such bills means creating now the money
that the acceptor of the bill will have to give up
later when it falls due. This is as much a creation
of money, followed by its destruction when the
bill is honoured by its acceptor, as the ordinary
bank " loan ". We are not, however, now con-
cerned with this aspect, though it makes chaos of
international trade relations.

The Balance of Trade. The foregoing proposi-
tion applies to any number of countries however
interlaced the exchanges of goods and services
may be, so long as in each the value of the
imports equals that of the exports. Or to put it
the other way, international trade and commerce
can only be carried on without complications,
as simple barter, when this condition obtains.
But if it does, then it is clear that there can be no
imports without equivalent exports and instead
of the interests of exporters and importers being
opposed they are the same. Literally, in each
country the first are paid by the second. But if
one of the group of countries imports more than
it exports, for example if Russia imports more
herrings from Britain than are equivalent to the
platinum it exports to America, it must be cut
out of the group altogether. For, in the illustrative
case of each importer paying the exporter in his
own currency, there would not be enough
American money in Russia to exchange for the
Russian money in Britain, In the simplest case

INTERNATIONAL ECONOMIC RELATIONS 125

the Russians would have to make up the deficit
by sending gold in exchange for their money.
All of this is quite simple to understand from
the standpoint of money as a debt instantly
repayable in goods and service on demand in
the country in which it is legalized (or can at will
be converted into legal tender), but entirely
meaningless outside that country. The whole
is an illustration of the cancellation of the mutual
inter-indebtedness of nations, which modern
money itself effects between individuals of one
nation. The cheque system, as it operates in
a single bank, is an example as between the
clients of that bank, and, as extended by the
Clearing House system, as between all the clients
of all the banks. In every case it is only the
unbalanced residuum that matters.

Effect of Loans and Repayments. The proposi-
tion can be widened to include the case of loans,
extended say from country A to country B and
repaid, either interest or capital, by country B
to country A. We may term the latter interest
repayment and sinking fund repayments, for
brevity, loan service. Then the proposition is
still true if, in each country, the difference
between the values of exports and imports can
be accounted to loans and loan service. The former
will increase exports without corresponding
imports, and the latter imports without corre-
sponding exports. Thus consider a loan from
country A to country B. A in effect puts B in

126 THE ROLE OF MONEY

possession of power to buy in A goods and
services, and if B exercises this power A's exports
to B are correspondingly increased without any
corresponding imports into A from B. So with
loan service, B repaying its loan, or interest on it,
in effect puts A into possession of power to buy
in B goods and services, whereby imports come
into A from B unbalanced by any corresponding
exports. In so far as this extended proposition
applies to each nation severally of a group of
nations, then still, however interlaced and various
the relations between the several countries, the
international traffic proceeds without any flow
of gold and with no disturbance to the foreign
exchanges. This is not to deny that these may
still take place through other factors, such as
tourists and others taking or sending money to
be spent in other countries. Conversely, in so
far as it is not true of any one of the nations,
its transactions must be cut out from those of
the group under consideration, and its accounts
with the others can only be squared either by
gold movements, exchange fluctuations, or other
countervailing factors. If all the countries are
on the gold-standard then there will be a flow
of gold from those countries whose imports
exceed exports into those whose exports exceed
imports, reckoned in the manner as extended
to include loans and loan service. If there is no
gold-standard, the exchange will go against the
former in favour of the latter.

INTERNATIONAL ECONOMIC RELATIONS 127

The Foreign Exchanges. It may be useful to
consider a simple case of the latter. Suppose
no attempt is made to affect the exchange between
two countries, either by speculators or others
holding foreign currencies in preference to their
own, or by tariff and bounties. Then the imports
and exports, apart from those paid for by loans,
loan service, or other direct imports or exports
of money, must be of equal value, whatever
their relative amounts. To take the first case
again, the British importer of tractors has
pounds to pay the American exporter who
wants dollars, and the American importer of
herrings has dollars to pay the British exporter
who want pounds. The exchange ratio between
pounds and dollars means and is absolutely
determined by how many dollars are obtainable
for i. Before anyone in England can exchange
his pounds for dollars, someone in America
must possess pounds to exchange and want
dollars instead. The exchange of monies is pure
barter applying to the two kinds of money exactly
as to any two different kinds of commodities,
and the exchange rate is simply the ratio between
the quantities of each offered and demanded.
The only difference is that normally money has
a homing instinct and each kind tends to return
as quickly as possible to the place of its origin,
where alone it is a legal claim for wealth and
can always and instantly be exchanged for it.

It is not possible in international commerce

128 THE ROLE OF MONEY

to cross the frontier and to replace a debt for
the goods and services of the one country by
a debt for a similar value of goods and services
of the other. The debts, that is the monies, must
be exchanged, and, before anyone can change
foreign money for his own kind, someone else
simultaneously must want it and give up the other
kind for it. It is only within the jurisdiction of
one country that the banking system can create
money like a conjurer producing rabbits out of
a hat, and then destroy it again. People may think
our bankers are singularly unprogressive in as
yet not having created an international currency
apart from gold, but such people are usually
more concerned with their own comfort and
ability to travel about from one country to another
than with anything so entirely beyond their
comprehension as this aspect of money. It
would be but small compensation to America
to have to give up on demand for international
money, say, a house to a British subject, because
the latter used to have a house in Britain but had
exchanged it with another Briton for the money.
Gold-Standard Drags all Nations down to Level
of Lowest. The ostensible object of a number
of countries uniting in making their monies
convertible into gold, that is adopting the gold-
standard, was simply to facilitate the accountancy
between nations. For if, as in the preceding
example, Russia exports less platinum to the
States than Britain exported herrings to Russia,

INTERNATIONAL ECONOMIC RELATIONS I2Q

the difference is made up by a shipment of gold
from Russia to Britain, and the accounts were
squared. But unfortunately in practice correct in-
ternational accountancy under the gold-standard,
operating with the entirely false accountancy
within the nations severally, where money was
arbitrarily created and destroyed at will, came to
mean that each nation was in turn frustrated
and brought back to the standard of living
prevailing in the poorest and most backward.
So long as a loan from one country to another
is a loan of goods and services, and repayment
is also in the form of goods and services no gold
drain results. The citizens of the debtor country
are empowered to indent on the marts of the
creditor country in the one case, and the citizens
of the creditor country on those of the debtor
country in the other. No money passes the
frontier.

Now it is of the nature of the case that the
countries that lend are richer and more highly
developed than those which borrow in the
monetary sense. But it is almost equally of the
nature of the case, when we use the words rich
and poor in the original sense of wealth or well-
being, that costs of production will tend to be
higher in rich countries than in poor. At first,
of course, as in the acquisitive Victorian epoch,
scientific methods of production, in exposing
the worker to the direct competition of the
machine, cheapen these costs. It was this which

130 THE ROLE OF MONEY

enabled Britain to become the factory of the
whole world. But, as such methods become
general and all nations become equipped with
the same labour-saving plant, the cost of pro-
duction will tend to be lowest where wages are
lowest, that is in the countries where the standards
of living are lowest and least protected from
reduction by labour unions and ameliorative
legislation, such as unemployment and health
insurances.

No other considerations than these are necessary
to make it clear that, though the poorer countries
will borrow from the richer ones in a monetary
sense, the borrowers will find it increasingly
to their advantage to borrow money rather than
goods and services, and to expend the money
in still poorer countries where costs are lowest
and the things they need are cheapest. Then
arises the triangular situation, of a country A
lending to another B which buys not in A but
in a third country C, and pays by draining gold
from A to C, precipitating in A deflation and
a period of prolonged economic paralysis. Thus
inevitably the gold-standard acts to keep all the
world as poor as the poorest nation which competes
for markets.

Effect of Freeing Foreign Exchanges. Now let
us examine this same case with the exchanges
absolutely free to adjust themselves. If A lends
money to B, B must take it as goods and services
from A. Converselv if B repavs a loan to A,

INTERNATIONAL ECONOMIC RELATIONS 131

A must take it as goods and services from B,
because any attempt to buy in a third country C
will put the exchange at once against the country
attempting to buy and make it more profitable
for the buyer to avoid exchanging money and
this he can do only by buying in the country
from which the money is received. Under these
circumstances the exchanges come nearly to
reflect, as they ought to do, the relative worth of
the monies, each in its own country. The par
of exchange then means the relative quantities
of the various monies which, each in its own
country, buys the same average amount of goods
and services. To be more precise, there is on
the average no economic advantage in changing
money at all. In so far as individuals are under
the necessity of doing so and their necessities
do not cancel each other, the exchange will
move against the country which, on the balance,
is changing its own money to pay foreign
indebtedness, so making it easier for the debt
to be settled directly by the transference of goods
and services rather than by exchanging money
at a loss.

Usually the case is argued along the lines
that it is impossible to maintain both a constant
internal price-level and a constant exchange
ratio abroad, and that the choice has to be made
between them. But the argument here is directed
to show that it is quite essential to leave the
exchanges free to find their own parity, when

132 THE ROLE OF MONEY

internal price-level has been stabilized. Let us
suppose two countries in which the par of
exchange reflects equal buying power of the two
monies, each in its own country. So far as the
argument is concerned, we may for simplicity
ignore the differences of quality between the
imports and exports of the one or between the
exports and imports of the other country, and
even suppose each country is importing exactly
the same things as it exports, as indeed to some
extent happens under our mad system, much to
the mystification of seafaring men. Then let
the one country, A, be inflated while the other,
B, maintains a constant price-level, the exchanges
being quite free to adjust themselves. Goods in
country A are becoming dearer. This operates
to check its exports and stimulate its imports.
But as in both countries the importer pays the
exporter of his own country in his own currency,
unless the exchange rate adjusted itself, the
importers in A will be paying the exporters
for more goods than they have exported, while
the importers in B will be paying the exporters
in B for less than they have exported, which, as
Euclid would say, is absurd. The device of
imagining the goods imported to be the same
as those exported merely makes what tends to
happen clearer without essentially distorting the
truth. The debts incurred by A in B, on the
balance for imports in excess of exports, can
oply be squared by the greater quantity of A's

INTERNATIONAL ECONOMIC RELATIONS 133

money in B exchanging for the lesser quantity
of B's money in A, since each is useless to the
exporters furnishing the goods until it is exchanged
for the other. But this is exactly what has really
happened, for it takes a greater quantity of B's
money to buy in B the same goods as before. So far
from attempting to equalize the exchange any
attempt to do so is to rob Peter to pay Paul, and the
more quickly the exchange turns against a country
debasing its money the better for all concerned.
But private speculation on the foreign exchange
must be completely stopped and the exchange
of national money for that of other countries
must also be put under direct national super-
vision.

Correct Use of Gold. Nor is there anything in
all this in the least detrimental to gold being
used as a convenient form of merchandise to
correct purely temporary or spasmodic disturbance
of the exchanges. For this, indeed, it is very well
suited. But it must be regarded as a commodity
and divorced altogether from its " gold-standard "
function of producing by its outflow and inflow
thirty-fold reductions and increases of the total
quantity of money. A currency stabilized at
a constant index number or price-level by
increasing the total quantity of money, as increase
of production puts on the markets increased
quantities of goods for consumption, would
still find a certain average holding of gold an
advantage in stabilizing the exchanges. If another

134 THE ROLE OF MONEY

country with money convertible into gold began
to inflate, its increased imports would be paid
for by outflow of gold so long as it had any, but
the gold accumulating in the country exporting
to it would under this system tend to be worth
less, in relation to the average of other goods,
than before. This itself would be an effect of
the same nature as the exchange going against
the country debasing its money. But, so far as
concerns the country with stable money, gold
is just one of the commodities it can buy abroad
with, and, apart from the convenience of using
it for smoothing out spasmodic exchange fluctua-
tions, it is free to import or export just as much
or as little as may be to its economic advantage.

CHAPTER VI

PHYSICAL REQUIREMENTS OF A
MONEY SYSTEM

J\/TONEY in the New Economics. It has been
'"* necessary to go at some length into
the evolution of the existing monetary system,
and also to show how it is operating to keep the
world in its present highly dangerous and
explosive condition. During the course of this
exposition certain suggestions have been made
for its reform. These depend in part at least
on the new and original interpretation of the
physical realities of economics that was dealt
with to some extent in the introduction. They
are likely to be much more easily understood
by those engaged in productive avocations than
by those trained in outworn habits of thought,
from whom, unfortunately for the world, most
leaders and administrators have hitherto been
selected.

It is not possible to mix these old and new
philosophies any more than it is possible to mix
science with witchcraft and magic, or for a
modern man to think and act within the same
horizon of ideas as a primitive people. Above all
the new economics of abundance or the monetary
system required to distribute it cannot be
expounded in terms of the old economics of

135

136 THE ROLE OF MONEY

scarcity. In this new philosophy money itself
appears for the first time in its true light, being,
instead of wealth, merely a receipt for wealth
voluntarily given up for it ; used in short as
a credit token. To-day, we allow the whole world
to be held in the grip of people who have discovered
how to get wealth given up to them without
even printing receipts for it ; in a scientifically
controlled civilization the issuer of money would
bear to the rest of the economic organism much
the same function as the booking clerk at a rail-
way station does to the rest of the railway service.
Just as the latter has to account for the money he
receives in return for the services of the railway
he distributes, the other would have to account
for the goods and services he receives in return
for the money he distributes. Such a simple idea
as this is the starting point of the role of money
in the new era. It is true that money tickets are
permanent and, once issued, go on circulating
for ever without being destroyed or cancelled.
But apart from this very much the same sort of
considerations of ordinary common sense are
involved as would apply to a railway.

There is now No Shortage of Wealth. In the
new economics there is now no difficulty in
creating wealth. Unemployed labour and capital
are only waiting to be given orders to proceed
to do so. If it were understood once and for all
that, when they had done so, the money would
be issued by the nation to distribute the product

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 137

at the same price-level as prevailed when the
costs in connection with their production were
incurred, nothing else would be necessary to
ensure that all the unemployed labour and capital
would permanently be put into full productive
operation. From that moment the nation, as
a matter of course, would be working all out
for the creation of wealth for consumption and
use as, during the War, it was working all out for
the creation of wealth for destruction. It is, in the
author's opinion, an exaggeration to suppose that
the time has yet arrived when it is impossible
usefully to employ any part of the labour and
capital available. No doubt a considerable
re-orientation of the productive system to meet
changed conditions may be required, but for
a long time to come we shall have full use for
everybody and everything able to assist in the
reconstruction of the world.

But those who wish to know further as to the
principles to be observed in order to achieve
this result must be prepared at this stage to cut
the painter altogether and part company from
the old metaphysical school of economists, who
realized the underlying physical implications
of the subject no more than the technically
untrained man. To a scientific man, it is well-
nigh incredible that a body of men, posing in
this very subject as experts, should for nearly
a century have failed to distinguish clearly between
the consequences of genuine lending and of

138 THE ROLE OF MONEY

pretending to lend by creating new money as
" bank-credit ".

Motive. The difference between the economist
and sociologist on the one hand, and the scienti-
fically trained mind on the other, could not be
better illustrated than in the treatment of human
motive, with which it might have been expected
that the former would have contributed more
than the latter. The economist saw in it nothing
deeper than desire for " profit " on the part of
a competitive horde of acquisitive individuals.
The sociologist fills volumes with the discussion
of " -isms ", personifying in the time-honoured
guise of gods and demons, and giving capital
letters to imaginary protagonists conjured into
existence to explain nothing more human than
errors of counting and economic swindling,
grosser (because more universal), than the
falsification of weights and measures. The
scientist takes it for granted that, in an individ-
ualistic society, unless men can obtain a liveli-
hood somehow they must cease to exist by the
ordinary process of starvation, and had better
not have been born. He recognizes, however,
that there is no power on earth, or for that matter
in hell, which can permanently obstruct men from
availing themselves of all that their knowledge
and skill can derive from nature for their
sustenance, thus arriving at a broad and satisfactory
theory of war, revolution, sabotage, and social
strife, which fits this age as a glove.

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 139

The Existing Wealth. It may be useful to start
this brief survey of the obvious physical principles
that must be observed if money is to play its
correct role in an individualistic community,
with a trite but physically important proposition.
If we contemplate everything of economic
value that distinguishes the present civilization
from any former one we may be sure that it must
have been produced and is not yet consumed.
In our advanced civilization it is seldom that
people either find or actually make the things
that they want. In practice men usually confine
themselves to some specialized form of labour,
relying for the rest on the activities of others.
This is known as the division of labour and,
though in the sociological sense this has more
and more come to mean a social scale with an
over-worked middle and voluntary or involuntary
leisure at either end, it is the purely economic
sense of the phrase that is intended. The things
produced directly by their owners for use and
consumption, as being exceptional, may be
accounted as produced by people employing
themselves, who however require sustenance
while doing so no less than those employed to
produce for others. It is natural therefore to
distinguish two main purposes of wealth,
according to whether it is consumed in just living,
in " Consumption Absolute ", as Ruskin put it,
or in producing new wealth for future use and
consumption.

140 THE ROLE OF MONEY

Consumption for Production and for Leisure.
The distinction is loosely expressed in the ordinary
monetary connotation of the terms spending and
earning. But, from a physical point of view, both
these actions equally entail consumption of
consumable wealth and the use of non-consumable
or permanent wealth, however much the things
consumed or used, either in just living or in
producing for the future, may differ in detail.
But it is not only this which accounts for a certain
confusion of thought in this subject. In an Age
of Want most people asked no more than, and
were glad if they got as much as, would maintain
them in a reasonable state and comfort for the
purpose of production. Wages, or, for that matter,
salaries, at least in the lower grades exposed to
competition, have never been anything else but
fixed by the average remuneration required to
enable the worker to carry on his avocation
efficiently, in the manner customary, and with
the standard of living and the social status usual
to that type of avocation, and to suffice to rear
a family or provide training for a new generation
to carry on the same occupations. Admittedly
there has always been a considerable elasticity
in determining the remuneration, as well as
in the degree of comfort and satisfaction different
people derive from the same remuneration,
according to an immense range of individual
circumstances and aptitudes.

But in an Age of Potential Abundance, with the

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 141

increasing opportunity for leisure afforded by
the increasing efficiency of the production process
the distinction is becoming of much greater
importance, and it seems desirable to separate
this use in " just living ", the real leisure use,
from the other more sharply. Leisure is becoming
no longer a luxury or old-age reward, but a
universal economic necessity, outside of the
production process, and quite apart from what
the term has usually been taken to mean
sufficient recreation to maintain the worker in
mental and bodily fitness. Death alone may
be expected to rid the world of those who, often
doing little enough themselves, yet regard a wage
above the subsistence level as an unhealthy
symptom and in need of financial correction
by deflation. There can be no doubt whatever
that, psychologically, this was at the bottom of
the disastrous financial policies the country has
pursued since the War.

Consumable and Capital Wealth. But on the
physical side there is a very real division of wealth
into two categories also, quite outside the one
just stressed, which though also purposive or
functional in character, does depend on entirely
different physical characteristics. It is the distinc-
tion between wealth that is consumable and that
which is not. It is this that the new economics
has stressed. The fundamental importance of
it was completely outside the comprehension of
the old. The existing confusions especially in

142 THE ROLE OF MONEY

regard to the nature of what is meant by the
chameleon-like term Capital, including all its
derivations and ramifications in the sociological
controversies concerning " Capitalism ", seem
to have their origin mainly in the neglect of this
essential difference. Thus to Marx (1859) " The
wealth of those societies in which a capitalist
mode of production prevails, presents itself as
an immense accumulation of commodities ".
Whereas to a new economist guided by the
energy theory of wealth, as already hinted, an
immense accumulation of commodities would
simply rot. It is quite impossible and moreover
very unprofitable to try to accumulate enough
wealth even to last the individual through old-
age. He is in daily need of fresh wealth, and the
accumulation is of debt not wealth. Moreover
these capital debts have the identical peculiarity
of money itself as a debt. They can never be
repaid !

To the individual, it is hardly of importance
whether the claim he possesses on the communal
revenue of wealth is a pure debt, like the national
debt, providing him with an income provided
by taxation of the incomes of himself and others,
or whether it derives from the output of a revenue-
producing enterprise to which he has lent or
entrusted money and so helped to start. But even
if it is the latter, the productive capital of the
enterprise itself is usually almost entirely worth-
less, except as a scrap valuation, if not used

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 143

for the particular purpose for which it was
provided, or if better means of supplying the need
are invented.

Capital Debts not Repay able. Productive capital
in this sense is only wealth to the individual
because (i) it may be ^changed for wealth with
another individual or (2) because he can charge
hire or rent for the use of the plant he has helped
to provide. Unless nationally owned, from the
community's standpoint it is, like the national
debt, merely a source of revenue to the owner
of the debt at the expense of the rest of the com-
munity. Both equally are physically irrepayable.

The essential consideration underlying the
foregoing is that though the two categories of
wealth may exchange among individuals, the one
cannot be changed into the other at will. The
change can only go one way, from consumable
wealth into permanent wealth, by feeding and
maintaining the producers of wealth. It is a
matter of choice whether the producers shall
raise pigs and grow corn or build factories, and
the maintenance required by the one type of
producer is not essentially different from that
required by the other. But the choice once made
is irrevocable. From the standpoint of the nation,
the exchange of one sort of wealth for the other,
whether it is A or B who own the one or the
other, is not of importance. The one owns the
wealth and the other the debt exactly as in
the exchange between wealth and money.

144 THE ROLE OF MONEY

Energy Considerations. This physical distinc-
tion between consumable and unconsumable
wealth is at bottom an energy distinction. In the
class of consumables proper, such as food, fuel,
explosives, and similar commodities, we deal
with things which are useful because they are
consumable or destroyable. In the category of
permanent wealth we deal with things that are
useful because they are durable and resist
destruction. In this class it is usual to distinguish
the permanent wealth that people make use of
and require in their personal and domestic lives
from that which appertains to their avocations
in the capacity of producers, and to which the
term " productive capital " may be without
ambiguity applied. For the former " personal
possessions " suffices. Before leaving the point
let us go a little farther into why this distinction
is so fundamental. The physical qualities
contrasted are, superficially, ability to change
and ability to endure, or changeability and
durability, but this only conceals a deeper mean-
ing. The first class by their change provide the
flow of energy which actuates animate beings
and inanimate mechanisms alike, but, for the
second, just because they are required to endure,
it is the other way. They are not used as internal
reservoirs or sources of energy at all, but must be
capable of withstanding change or alteration
when subject to external force or stress. For
spontaneous change in the material sphere only

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 145

occurs accompanied by a change of energy
analogous to that of water running downhill.
Our distinction at bottom is between the things
that can change, yielding such a flow of the
energy that actuates life, and those that can resist
change when subjected to energy attempting
so to flow (force or stress).

In practice we distinguish, in border line cases,
by *the function ; that is to say by which of the
two contrasted qualities is the useful one. Clothes,
and the like, which are required to last as long as
possible, are considered permanent, though for
these fashion operates to shift them more over
into the consumable class than necessary, the
motives of the producer and the consumer being
(in our mad world) antagonistic. Whereas
however tough a beef-steak may be it is only
useful in so far as it is consumable, and in so far
as it resists digestion it is undesirable.

Productive Capital not Distributable. In this
sense of Capital, as the unconsumable product
of the consumption of consumable wealth, there
is no distinction, for example, between a house
used as a private dwelling and one used as a
factory. Both are the products of the expenditure
of work or energy, and in so far as they may be
sources of energy themselves (by falling down or
catching fire) are undesirable. But from the
standpoint of the role of money there is this
important distinction, that a private house comes
into the consumers' mart as one of the commodities

146 THE ROLE OF MONEY

required for the use of consumers, whereas the
factory does not. Its purpose is intermediate,
as Ruskin remarked of Capital, and it never
leaves the production system at all. It may change
hands within the production system, but that is
of no particular national significance so far as
the accountancy reflecting its existence is
concerned. Yet both are essentially identical
so long as we consider only their mode of
production. This no doubt was in the mind of
J. S. Mill in his statement " The distinction
between Capital and Not-Capital does not lie
in the kind of commodities, but in the mind of
the capitalist, in his will to employ them for one
purpose rather than the other ". Nevertheless
when he has made up his mind and acted upon
his decision a very important distinction does
enter. It has been common since the day of
Adam Smith to refer to a stock of commodities
and plant, mentally ear-marked for use in pro-
duction, as Capital, and from this to extend the
use of the word to money intended for this purpose.
It is impossible in economics to make water-
tight logical definitions or distinctions universally
applicable in all cases. Even in mechanics the
laws become different when we deal with velocities
comparable with that of light, though within
the range of practical engineering these complica-
tions are, as yet at least, completely without
significance. But there must be a definite
consistent use of the terms within the range,

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 147

often quite narrow, to which the argument
applies. It is far more important that they should
have a narrow known and definite meaning than
that their meaning should be made so wide and
vague as to cover every conceivable contingency.
For then, as in political and sociological contro-
versies, they may mean half-a-dozen different
things at different times in the course of a single
argument. So with Capital, it would probably
now be much better never to use the word at all.
Capital under Communism and Individualism.
From the standpoint of the present book the use
of the term is confined to the unconsurnable
product of consumable wealth used for the
production of wealth, and it is considered as the
sub-category of permanent wealth, distinguished
from private possessions by its function in
production. We are not concerned with intentions
but the physical consequences of actions. It is
only in this sense that the controversies concerning
nationalization of the means of production,
distribution, and exchange, and the differences
between Communism and individualism have
any real meaning. Forms of government have
far less significance than people are apt to suppose.
Thus the necessity of capital in the above sense,
in general just in proportion as civilization
advances, no one now questions. Every new
advance in production is due to something
analogous to the evolution of the plough into the
tractor, demanding more and more people being

148 THE ROLE OF MONEY

set aside and maintained while producing and
keeping in order the plant required for production,
but not actually producing anything whatever
that the ultimate consumer requires.

In a Communist state this is no less true than
in others. There, the Government, as the owners
of everything, take as much as they require not
only for their own services but also for the
provision of new capital, and the actual producers
then get anything of the consumable and privately
usable wealth that may be left over. In an
individualistic society, for which we are exploring
the role that money has to serve, the capital is
provided by " investment ", which means that
people instead of consuming all they earn in their
private or personal capacity empower others to
expend it in revenue-producing enterprise, upon
the output of which they acquire a lien or claim.
But, after that, they can only get their principal
back in any form at all useful to them by exchang-
ing for new wealth their claim with someone else.

The consequence of this is that, in any modern
individualistic State, there is always a very great
deal of production going on which adds nothing
directly to the products people purchase in their
capacity of consumers, and which has to be
accounted for by " investment " or some form
of " saving ", in which titles to consume are
surrendered by their owners and transferred to
others. Moreover this part of the expenditure
iSj nationally, quite irretrievable and irrepayable.

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 149

All Costs of Production are Distributed to
Consumers. It does not in the least affect the
accountancy that this " capital " consumption
is intended to lighten the labour and cheapen
the costs of future production, and, if successful,
does actually do so. In physics there is neither
interest nor discount, neither lending nor borrow-
ing. All these only refers to mutual arrangements
as to ownership which people may choose to
make among themselves. Neither do the various
elements that make up cost or price enter into
the physical accountancy, nor such distinctions
as between the relative proportion of raw material,
labour, overhead charges, profit, interest, and
rent, or between wholesale price, retail price,
cost price, sale price, and the like. We are not
concerned with how the cost or price is divided
among the various individuals participating, but
merely with the total, being very sure that
whoever receives it, and in whatever capacity,
will enter into full individual enjoyment of it,
whether it is earned or unearned, just or unjust,
for positive or for merely negative and permissive
services. Though many such things, of course,
may make a great difference to the social well-
being of a community, and, in particular, to the
relative proportion that an individualistic society
may elect to use its wealth on personal consump-
tion and use or in productive expenditure, these
things are all subsequent to the question of the
role of money as an accounting mechanism.

150 THE ROLE OF MONEY

Production for Consumers. Let us separate the
two essential functions which are always going
on together, so as to see each by itself, and suppose
we are dealing with a system neither increasing
nor decreasing its output, and with money at
a constant price index of purchasing power.
As regards the production and consumption
of wealth for private and personal use we may
divide the circulation proper of money into two
halves, the production and consumption halves
of the cycle. The two halves of the circle join (i)
where money is paid out from the production
half as wages and services, for putting wealth
into the production side, and so it finds its way
into the consumers' pockets (2) where the money
is paid back by the consumers into the production
system to buy the product they have produced
in an earlier equivalent period of production.
The circulation of the money is endless, with
only the consumable, and privately-usable wealth,
produced flowing out at (2) for consumption.
The total aggregate paid out in respect of the
production of any definite quantity of things
produced is the price, and it is only because this
money is paid out that the product can be bought
and the same money used again to produce a
fresh quantity. The same money goes round
over and over again distributing an endless
succession of goods and services to the consumer.

As already indicated, it is a beginners' mistake
to imagine that all the costs incurred by industry

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 151

are not distributed to buy the product. It is
utterly incorrect to suppose that there is any
difference between them. Overhead charges,
interest, rent, and profits no less than wages,
salaries, and costs of materials, all are payments
to individuals who do not hoard them in their
stockings, but spend or invest them, in their
private capacity as consumers, just exactly the
same as other people. As regards this one purpose,
production for and distribution to the ultimate
consumers, the costs incurred balance the costs
distributed.

Production for Producers. But when we
consider the second purpose, production of
capital, the product is never distributed to
consumers at all, but remains its whole useful
life in the production system. When a factory is
built it is paid for by people, instead of going
to the consumers' mart to buy things for their
personal use and consumption, returning it direct
to the production system, and authorizing the
producers to expend it again as wages, etc., to
build the factory, but the factory never is distri-
buted to consumers and never can be. This
may be expressed by saying that investment or
saving by-passes the consumers' mart. The money
circulating, instead of taking out the same amount
of wealth as it puts in at every revolution, now
circulates through the production system twice
creating fresh goods, but only takes them out once,
resulting in an increase of wealth in the production

152 THE ROLE OF MONEY

system. But this increase is " productive capital ",
useless for the consumers' requirements and, as a
matter of fact, it is never distributed at all.

The Accumulation of Debts. The productive
capital is built up by the creation of a permanent
and irrepayable debt owned by the investor and
owed to him in perpetuity. The same we shall
soon come to see applies to every increase in the
quantity of consumers' goods in course of
production, as well as to the fixed capital, and this
is the most important error of accountancy
hitherto made by money economists, for until
this is understood it is quite impossible to main-
tain a fixed value for the money or a constant
price-level. Both on account of increases of fixed
capital and replacements and renewals of obsolete
or outworn plant, as well as on account of the
increase in goods in course of production in an
expanding era, if the expansion is not to be
ephemeral, the production system distributes
far more money than the money it receives for
the products it distributes, and the difference
is the accumulating capital debt, under which
all nations alike are now groaning.

Solution of the Unemployment Problem. The
immediate problem that has to be solved is to
bring back at once into useful production the
whole of the available unemployed labour and
capital. The most conservative estimate is that
in this country a twenty-five per cent increase
would at once result. This means that in a few

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 153

months everyone would on the average be twenty-
five per cent better off than before. But the real
increase that would result, if production were
no longer throttled by money manipulation,
cannot possibly be estimated from the present
figures, as so much of the output is now distributed
by piling up redundant and superfluous distribution
costs, and this would no longer be necessary.
It is perfectly correct to issue new money after
the increase in the rate of production has been
proceeding long enough for the increased quantity
of goods to appear on the market. The retailers
then have new goods equal in value to the new
money issued to distribute them. But it is quite
wrong to issue it as a debt to industry in order
to enable the new production to be begun. That
is precisely analogous to setting up a booking office
before the railway is built and financing the building
of the railway by the forward sale of tickets.

Cost of Increasing Production not Repayable.
A simple illustrative example may serve to make
this vital point clearer. Suppose a weekly
additional distribution of a million pounds' worth
of goods is desired, and that it takes thirty weeks
from start to finish of production before the first
new million pounds' worth appears for sale, after
which there will be a similar amount appearing
every week. If the costs of production are uniform
over the period of production, then the appearance
of the first new million pounds' worth of wealth
corresponds with the expenditure not of a million

154 THE ROLE OF MONEY

pounds but of fifteen million pounds in general,
of half the product of the time in weeks and the
quantity produced per week. Besides the finished
product, there will be thirty weeks' production
of unfinished products ranging from zero value
at the beginning to full value at the end, and,
on the average, of half the value of the finished
product. All of this is taken from the value of
the existing money by extending credit to the
producer without anyone giving up anything
at all. The money loses in value in proportion
to the increase because the new issue takes out
of the market the equivalent of finished goods
without putting any back into the market. While,
as regards the fifteen million pounds' worth of
intermediates it puts in, that quantity must remain
therefor ever after, as much being put in as comes
out, unless the new increased scale of production
is to be reduced again to what it was at first.

The case is entirely analogous to starting to
distribute oil by means of a new pipeline, and
omitting to account for the quantity necessary
to fill the pipes. Always that amount more of
oil must be put in than comes out, so that this
part of the fluid saleable wealth has to be accounted
in the monetary system exactly as fixed capital
and paid for by permanent investment, in which
the consumers' mart is by-passed and the money
paid out of the production system is put back
directly into it without taking out anything from it.

Exchange of Owners Contrasted with Creation

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 155

of Wealth. Before leaving the complexities
appertaining to the exchanges between wealth
and money, slurred over rather than elucidated
by the vague term " circulation ", which have
led economists into all sorts of impressions anent
its " velocity " and the changes consequent upon
the increases and decreases thereof in increasing
and decreasing the rate of production of wealth,
we may, for completeness, consider a few of the
less essential operations. The division of the
cycle into two parts, a producers' side and a
consumers', side, is a device to eliminate the
unessential exchanges, and it remains to consider
these. They are of the nature of changes of
identity of individual owners of property. On the
consumers' side, all sorts of exchanges are going
on mainly in regard to permanent possessions,
sales of houses, estates, furniture, and the same
is true, on the production side, with regard to
plant, factories, and investments representing
ownership in, or debt-claims upon, the production
system. Nor does it seem to be important that
individuals owning private property may exchange
it for capital investments and vice versa, for in
such cases the owners exchange sides leaving
the wealth where it was. The circulation of money
proper is distinct from all such mere exchange
of ownership in this, that it is essentially an
exchange of services for the creation of new
finished wealth, and it is only in this exchange
that new wealth arises.

156 THE ROLE OF MONEY

The Quantity of Money cannot be Calculated.
But the complexities show that it is not possible
to calculate beforehand exactly how much money
must be issued to distribute any given increase
in the rate of production. One cannot simply
say there must be always as much money as there
are goods for sale. A similar point, called attention
to by recent writers, is the greater quantity of
money " absorbed " in the production system
through the growing complexity of methods of
production and the number of different organiza-
tions handling in series the wealth in course
of manufacture, which is one of the consequences
of the division of labour. We have to avoid endless
calculations of this character.

The habits and customs prevailing both among
producers and consumers cannot be eliminated
from the question as to the quantity of money
that ought to exist to distribute, at a constant
price-level, any given output, or how that must
be increased as the output increases. Thus, in
the given illustration, it would only require a
million pounds of new money if, after the system
had settled down at the increased output, it
took a week on the average for the money after
its presentation at the consumers' mart to arrive
there again. It is hardly possible even to guess
this, from such data as may exist concerning
a monetary system in which the quantity is
reckoned from an always varying minus number,
and in which the amount in existence is unknown

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 157

because of the slurring over of the distinction
between current and time-deposits. For similar
reasons, the amount of genuine investment
necessary, as a preliminary building up of the
system to a higher output, is completely incalcul-
able. It depends entirely on innumerable average
factors, none of them very definitely known,
relative to the nature of the increased production
which the public demand, again unknown in
advance.

The Price Index Determines the Quantity of
Money. Fortunately it is entirely unnecessary
to go further into these unknown factors, because
the price index itself, under the system described,
regulates the rate at which the new money would
be issued. Postulating money only created, or
if necessary destroyed, at the bidding of statis-
ticians watching the price movements, and then
issued to consumers as a relief from taxation,
the price index would be controlled on the same
principles as the speed of an engine is controlled
by the engine driver. The latter could not possibly
tell beforehand the integrated effect of the factors
affecting the speed of the train, such as the
gradient, the efficiency of the engine, the tempera-
ture and pressure of the steam, and so on. He
simply opens the throttle if he wants to go faster
and shuts it down if he wants to go slower,
leaving the rest to his fireman. The production
of new wealth under the most efficient and rapid
processes can safely be left to the technologist.

158 THE ROLE OF MONEY

All that is necessary is to have a system of creating
new money if the price-level tends to fall and
unsaleable goods to stack up, and to destroy it
if they get scarcer and prices tend to rise. This
is quite impossible under the existing banking
system, but quite possible under a rational,
scientific, and national system, designed in
accordance with the physical realities to which
the production and consumption of wealth must
conform. To imagine otherwise is to attempt
to preserve a system in which money is issued
not to distribute wealth but as a source of revenue.
If there is one lesson that the history of money
enforces, it is that when its issue is used as a means
of enriching the issuer, whether the issuer be
the State, the bank, or the counterfeiter, it is
the most disintegrating and dangerous power
ever invented by man. If there is any such thing
as corporate will or corporate sense of danger
in a community, it is imperative this lesson
should be learned before it is too late.

The Wasteful Costs of Distribution. But before
leaving this subject it may be stressed again how
large a part of the present effort of humanity
is directed to the piling up of all sorts of
unnecessary distribution costs to distribute the
product, and enable everyone to share in the
limited output, that is entailed by our funda-
mentally false monetary system. If these were
eliminated, as they naturally would gradually
be eliminated, by having always sufficient money

PHYSICAL REQUIREMENTS OF MONEY SYSTEM 159

to distribute all that can be made, we may look
not for a twenty-five per cent increase of prosperity
but for a four- or five-fold increase. As Sydney
Reeve stresses in his writings, over eighty per
cent of the cost is piled up under " commercial-
ism " by entirely unnecessary competition for
the sale of goods, whereas the costs of their
manufacture are fined down to a fraction of
one per cent. This undoubtedly is the gravest
consequence of the orthodox economists mistaking
the exchange of goods for their creation and not
bothering very much about the latter at all.

The Role of Money Summarized. Summarizing
this account of the role of money as the accounting
mechanism, we find, taking the wide definition
of costs explained (p. 149), that everything that
exists of wealth of use to consumers is accounted
or paid for by the true circulation of money,
through the production and consumption systems,
the money being paid out from the former for
services in producing wealth and back again into
it to take the wealth produced out. The existing
wealth is the difference between what has been
produced and what has been consumed, and this
is continually changing owners by means of the
hither and thither movements of money among
individual consumers, apart from and without
effect on the true circulation. With regard to
what exists of wealth of use to producers, which
is subject to the same perpetual exchange of owners
by similar movements of money among producers

l6o THE ROLE OF MONEY

without effect on the true circulation, and which
also conies into existence in the same way as the
consumers' wealth by this circulation, it is not,
strictly speaking, accounted or paid for, but the
costs of production accumulate as a permanent
debt-charge on the production system. Exactly
the same is the case for all the consumers' wealth
in course or process of production, and the fact
that this will ultimately be distributed to
consumers makes no difference whatever to the
accounting, as economic systems have to function
continuously and for ever without being wound
up. On the other hand, money itself is an asset
in drawing up the balance of costs, on account
of the fact that its possessors accept and regard
it as payment in full, though in fact it is a promise
to pay in the future. To this extent what is given
up for it in the way of goods and services the
Virtual Wealth is available to pay part of the
costs incurred in the production system, but it
can only be in general a small part even of the
particular costs last considered, namely those
sunk in the wealth in course of production.
No scheme of monetary reform can be correct,
or any money system sound, in which all the
existing wealth cannot be accounted for in some
such manner as the foregoing.

CHAPTER VII
DEBTS AND DEBT-REDEMPTION

AN Age of Power rather than of Machines.
-** The older conventional ideas as to human
progress, that it results from the benefits of human
association and the division of labour, making
each member of the community able to contribute,
when engaged in a specialized form of occupation,
much more to the common fund of wealth than
would be possible if everyone had to provide
independently for his own requirements, while
true enough as far as they go, hardly touch the
origins of the fundamental step forward in progress
attained in what should be called the scientific
age. Tools in the broadest sense have always
been considered the real civilizers, increasing
the efficiency of their human users in the various
tasks of life. But that stage we have altogether
outgrown. People who talk about the Machine
Age are putting the cart before the horse. Modern
machines are usually stronger, more tireless,
and more accurate imitations of specialized
productive functions of men ; and have to be
fed just like men. Unless energized they are dead
as any corpse. Though men have not yet learned
to feed directly on fuel, during the War some
tropical river steamers are said to have been run

161 M '

l62 THE ROLE OF MONEY

on monkey-nuts, and, after it, the American
farmers of the Middle West are reputed to have
been advised to use their wheat as fuel to keep
up the price. Scientifically, there is less distinction
between manufacture and machino-facture than
is commonly supposed. In both it is the energy
that is the prior consideration. Whether it is
derived from a man or beast, fed on food, or
from a machine fed by fuel, is of minor import
as regards the object, which is the production
of wealth.

Men in the economic sense, exist solely by
virtue of being able to draw on the energy of
nature. Primitive civilizations were almost entirely
dependent on its flow. They utilized the sunshine
to raise food and rear draught-cattle and drew
on the winds to propel their vessels, and to some
small extent also on rivers to drive their water-
wheels. But these are now supplemented by a
store of energy laid down in fuel from days before
man's footprint had appeared on the world.
Thermodynamics has taught us how to convert
the heat it furnishes on combustion into
mechanical power. The primitive labourer was
the intelligent transformer of the flow of energy
in sunshine. The modern engineer has widened
the function, to a considerable extent displacing
the labourer from production. But no man
creates the energy, however much it may appear
that he creates wealth. Wealth, in the economic
sense of the physical requisites that enable and

DEBTS AND DEBT-REDEMPTION 163

empower life, is still quite as much as of yore the
product of the expenditure of energy or work.
But now it is largely produced by fuel-driven
machinery, embodying the essential movements
required for each step of the production in an
automatically recurring cycle, rather than by
individuals working under their own volition and
power. Nature has been enslaved and men may,
indeed must, be free.

Money Unrepayable National Debt. In this
book we are primarily concerned with the role
of money as the accounting and distributing
mechanism, enabling generalized and social
production to go on smoothly, combining the
advantages of human association and the division
of labour with the distribution of the product for
individual and personal use and consumption.
There is not the slightest doubt that the invention
of money, displacing early patriarchal and
feudal forms of communism, originally added
enormously to the liberty of the individual. The
modern tendency towards communism is entirely
due to the fact that the primary function of money,
the distribution of socially produced wealth, has
been replaced by an entirely subordinate and alien
one how to issue money so as to make it a
source of revenue to the issuer, and to bear
perennial interest. This might be more readily
intelligible if those who gave up wealth for money
received the interest paid on the issue, but instead
they pay it ! It comes into existence by the

1 64 THE ROLE OF MONEY

simultaneous appearance of two equal items on
the two sides of a bank-ledger, whereby on one
side the borrower is credited with the sum
borrowed and on the other debited. Taxpayers
have so far failed to notice a similar but opposite
peculiarity of accountancy in the national accounts.
They receive each year demand notes purport-
ing to show the amounts spent on services, the
largest items on which are Local Government
and Education, each costing 48 millions. But
the largest item Bank Services 100 million,
or thereby, is omitted. Similarly, in the Revenue
accounts, the corresponding item " Interest on
goods and services levied as bank-credit " fails
to appear !

Capital Debts Unrepayable. " Saving " Conven-
tional. Apart from this irregularity, we have
seen that while the circulation of money through
the production and consumption halves of the
cycle accounts correctly for the production and
distribution of consumables, using the term to
connote the wealth of use to consumers, it
accounts the production of capital in the produc-
tion system itself as a debt to individual investors,
and these debts accumulate continuously and can
never after be repaid, because they represent
expenditure on things that are never distributed
^nd, if they were, would be quite useless to the
investor.

It is interesting that precisely the same mistake,
making money a debt to private firms when it is

DEBTS AND DEBT-REDEMPTION 165

irrepayable by its very nature, is, with respect to
capital, also at the root of all the stale political and
sociological controversies between capitalism and
socialism. As a heritage of the unscientific
and muddled economics of the Victorian era,
the most extraordinary confusion persists in
political circles on this question in connection
with nationalization and similar schemes, and to
these we shall have to revert. But, unless indivi-
duals prefer to trust a benevolent State to support
them in old-age, they must u save " and all
this saving business is conventional lending
a surplus of income over expenditure in order
to get it back later and, in the meantime, a revenue
from it as interest. But there is no wealth avail-
able, outside of the flow or revenue of wealth
from the production system. This is real. All the
rest is mere accountancy between debtors and
creditors. Claims are accumulated on the revenue
of wealth both as regards the use of productive
capital, derived from the hiring of it out by the
owners to the users, and on the revenue of the
State, raised by taxation, to meet the service of
loans raised by it. These loans are almost entirely
for non-revenue producing expenditure, namely
destructive wars for the greater part and necessary
national improvements and developments for
the smaller.

Necessity of Constant Price Index. Now this,
without any other argument whatever, is sufficient
to dictate that no monetary system can be honest

1 66 THE ROLE OF MONEY

or worthy of the confidence, either of the
community or of other nations having economic
dealings with it, that does not maintain an
invariable price index. This is becoming every
day more obvious through the bitter experience
of the War and post- War epoch. Before people
understood the insidious methods of swindling
through keeping the price-level always on the
move, there were plenty ready to argue that, if
the costs of production fell through scientific
improvements in manufacture, the price of goods
ought to fall to the same extent. In that way every
debt is subtly increased in its burden and the
creditor put into the possession of an uncovenanted
benefit, quite outside of and additional to what
is in the bond as regards interest payment and
capital repayment. Once one allows this, then
the economic system simply becomes a cockpit
for the struggle of wits, in which the agents and
representatives of the creditor class are out, like
the banks, to get something for nothing. This
can only come by those who produce wealth
setting aside more than before to serve the same
nominal amount of debt, and, therefore, can only
be derived by a corresponding reduction in the
share of those producing it.

It will therefore be taken for granted that the
money of the future must be of constant purchasing
power in terms of the average, sufficiently
nearly, of the things it is used to buy, from one
century to another, before any real advance is

DEBTS AND DEBT-REDEMPTION 167

possible from the present disgraceful bear-garden
of perpetual conflicts nominally between
" capital " and " labour ", but in reality between
creditors and debtors, which the national creative
organization has been allowed to become under
the existing dishonest economic and monetary
system.

How the Workers would Benefit. It will of
course be asked at once, at least by those who
want change, how, under such a system, the
worker will benefit by the cheapening of the cost
of production due to future improvement. It is
easy to see that he, to this extent, loses the benefit
if he has to share with the mass of pre-existing
creditors the benefit that would arise from lower
prices.

On the other hand, if costs are prevented from
falling as the conditions in industry improve,
producers are guaranteed a market for their
maximum output, so long as it is what the public
are actually demanding. There is no limit to the
issue of new money, if properly carried out, so
long as unemployed labour and capital are
available. This unlimited demand for labour and
capital would restore the bargaining power to
labour without any need for, and far more
effectually than, collective action, the only effective
weapon of which, the strike, actually strikes most
directly at the standard of living of the workers,
by sabotaging the output out of which they as
well as the creditors are paid. Usually the workers,

1 68 THE ROLE OF MONEY

having less reserves than those who have accumu-
lated savings, suffer most by this sort of warfare.
Whereas with the lowered costs of production
resulting in a greatly increased turn-over, and the
rising competition among employers for the whole
of the available workers (as during the War),
wages must rise until the latter obtain a fair share
of the economies effected by increased output.
At the same time, the principle underlying the
new money system should be enforced with
regard to new capital debts. It should not be
possible, by a stroke of the pen, for any company
to increase its nominal indebtedness to its share-
holders and issue to them new shares without
their contributing the full value in fresh capital.
But it is only right that those who take the risk
of loss in providing capital for industry should
participate with the workers in increased
prosperity. These points are however really
covered by making all debts terminable after
a definite period, a scheme which lies outside the
role of money proper, but which will be reverted
to at the end of this chapter as an essential feature
of the new outlook on these questions which
the physical understanding of them gives.

Regulation of Money by Price Index. Thus we
have reached the point that the first consideration
of national or general well-being is a money that
always purchases the same average amount of
the things it is employed to purchase. Honest
people have everything to gain and nothing to

DEBTS AND DEBT-REDEMPTION 169

lose by honesty. Although it would not be true
to pretend that as yet the ideal way of fixing the
price-level has been elaborated, it is a problem
that could safely be left to a disinterested bureau
of statisticians, analogous in function to the
bureaux of standards, or, in this country, the
National Physical Laboratory, which undertake
the absolute determination of the standards of
weight, length, and volume, and check the actual
weights and measures by which economic trans-
actions are effected. There is, in fact, already
sufficient experience of the determination of
price-levels and index numbers, by the Board
of Trade and various other institutions, to make
it quite certain that no serious difficulty would
arise in practice.

It must be remembered that, by absolutely
prohibiting the continual arbitrary variation of
the quantity of money at each instant in existence,
upon which " banking " now depends, and making
its quantity known and definite, the real cause
of the disastrous fluctuation of the price-level
would be removed at the start, and it is quite
absurd to argue from what has been happening
in the past as to what will occur in the future.
Obviously it is impossible to maintain a constant
price-level under a banking system, in which
money is arbitrarily created and destroyed by
extending and withdrawing it in the form of loans
or credits to industry, which loans can only be sunk
in preparations for future production, and out

1 70 THE ROLE OF MONEY

of which both interest and profits must be earned.
But, if money were only issued to consumers,
as a remission of taxation, by the nation so soon
as finished wealth awaited sale over and above
that which can be sold by the existing money
without fall of price-level, then appreciable
changes in the latter could not and would not
occur.

A Simple Price Index. There remains, it is
true, the technical question as to which price-
level to fix, and how it is to be computed, but in
the stabilized economic world, which would result,
the question seems of secondary importance in
comparison with the advantage of fixing the price
of any reasonable representative average of the
things which the money is used to buy. Cut out
the creation of money as a means of earning
interest and create it for consumers, and the
economic system will enter into definite equili-
brium relations between all the various factors
which determine relative prices of the different
categories of the immense variety of things bought
and sold. It would become a highly conservative
and stable system, completely unrecognizable
from what it is now, with the money continually
being drained out from one part to be injected
into another, and, all the time, the amount in
existence being inflated and deflated like a
concertina.

It would seem that, as a start, a simple index
based, for example, in the first instance on the

DEBTS AND DEBT-REDEMPTION 171

average cost of living for a skilled artisan's house-
hold would serve. It would be the duty of
impartial statisticians studying the tendencies to
advise from time to time if the index could be,
in general, improved and made more representa-
tive. It seems in every way desirable, in order
to avoid any initial unsettling orgy of gambling,
to stabilize the index number of prices at the
existing level. Whatever that was, an average
weekly or yearly budget would be constructed
representing, at that time, the chief items,
separately, in the cost of living of the type of
family chosen as typical. At any future time, the
same items in the same quantities as then computed,
if again computed at the new prices prevailing,
should amount to the same total, however much
they might differ individually among themselves,
if the price-level does not change.

The Statistical Bureau. This illustrates the
principle, though of course in practice the actual
work of the statistical bureau contemplated should
cover the whole range of the nation's economic
activities. One of its functions should be not only
to collect but to interpret data, and to answer
specific inquiries, not only for the Government
but also for all representative bodies carrying
on the economic work of the community. It
should certainly not be a Government Depart-
ment any more than the Law or the Universities
are, or under any one of them, and especially
not under the Treasury. That would be a fatal

172 THE ROLE OF MONEY

mistake, as the Treasury would be the one
department directly interested in the profits of
the issue of new money. The temptation to
issue too much and swindle creditors would then
always be present. The new money must not
be issued with the object of providing a source
of revenue for the relief of the taxpayer, though
that is the necessary consequence.

The statistical bureau should be nominally
directly under the Crown or the supreme head
of the State, whoever that may be, and in much
the same position, as a disinterested advisory
body charged with definite metrological functions,
as the National Physical Laboratory. Its recom-
mendations should go formally to Parliament and
be normally acted on automatically.

A Reconstituted Mint. For the actual issue of
the national money, the Mint should be reconsti-
tuted to cover not only coinage but paper money
also. The issues would be handed over to the
Treasury, and added to the sums levied by
taxation. As we have seen, the issue of credit
money is really a forced levy or tax on the
community, and the money itself is the receipt
that the owner has rendered up equivalent value
for it, and is entitled to the same value back on
demand. The money should bear the legend
" Value Received " instead of " Promise to
Pay " and also the statement that it is legal
tender in the country of issue. It should be
regarded by the public as issued to postpone

DEBTS AND DEBT-REDEMPTION 173

payments they would otherwise be called on to pay
by taxes, and they should understand that, if there
is at any time too much issued, it will be with-
drawn in part by imposing the postponed taxation
and destroying the requisite amount of money
to prevent the value of the rest falling below par.
Money would then appear publicly for the first
time in its true light as a permanent floating
non-interest bearing debt or liability of the
whole community to its owners, repayable in
goods and services on demand by mutual exchange
within the community.

Criticism of Proposals to Nationalize " Banking ".
Apart from initial and transition stages in which
it may and probably will be necessary to continue
existing credits to producers until such time as
they can free themselves from debt as they
quickly would do under an honest monetary
system what the nation needs is not more
credits to producers but more money for
consumers, and the correct way of issuing this
is as a relief to the taxpayers in general. The
proposals of the Socialists to nationalize banking
show no understanding even of how to operate
the system so as to secure a stable internal price-
level which is the sine qua non of any real advance
to just economic prosperity. They seem to
contemplate doing precisely what the banks are
doing now, at ruinous ultimate cost to the
industries of the nation, the only difference
being that the profits would be devoted to their

174 THE ROLE OF MONEY

ameliorative and charitable efforts. It will, of
course, be argued that the profits of the issue
of new money would be given to assist enter-
prises really beneficial to the public. But this,
with the necessity of their being either competitive
or forms of government patronage, is a contra-
diction in terms. They will be given to whom
the government really thinks fit, and that, to be
sure, is to assist themselves first and all the time,
just as it is now given to and through the Bank
of England !

Socialists never seem conscious that the people
themselves are a better judge of what they need
than any government they have ever in past
history had, or in the future are likely to get.
The whole structure of ameliorations and charities,
in which the needy are provided out of what the
general taxpayer may be forced to provide,
would fall to the ground, like a pack of cards,
if everybody had the opportunity of providing
out of his own earnings sufficient and to spare
for his needs.

Prevention Better than Cure. Prevention is
better than cure and the world is being kept
diseased by those who wish it worse, so as to have
the opportunity of curing it. That is the most
amazing feature of the world to-day. Things go
wrong and, ever after, it is saddled with vested
interests in the cure. The whole modern bureau-
cracy is engaged in the consequences of quite
elementary and easily comprehended mistakes,

DEBTS AND DEBT-REDEMPTION 175

and it is the most unpopular thing in the world
to imply that human beings are really far more
able to take care of themselves than left to those
by whom their ailments are being nursed. The
amount of unemployment that would result
from preventing the known errors that have sent
the scientific civilization off the rails is appalling
to contemplate. It would involve most of the
people now trying to sell us things having to give
their services to producing them, and most
of those who derive their livelihood from busying
themselves with the affairs of State having to
take a leisurely interest in their own. It is old
as the hills, the Hippocratic wisdom of cure
opposed to the /Esculapian cultivation of health,
now become universal ; in brief, quackery versus
knowledge. Release in fountains of life and leisure
the flood of energy that the technologist has now
under control, and the world would quickly cure
itself of the weeds that thrive in its starved
soil.

Interest on Debts. Although the accumulating
burden of debt of individualistic societies lies
outside the role of money in a narrow sense, the
subject is so linked with it and is so vital to the
future of these societies that it cannot be ignored.
The physical explanation is the very much
greater amount of labour that has to be expended
on the tools or plant required to operate power
production than in primitive methods. The
enormous capacity of modern prime-movers

176 THE ROLE OF MONEY

enables production to be achieved on a correspond-
ing scale, but at the same time make the provision
of the necessary plant quite outside the capacity
of individuals to provide. Hence arose the
joint stock company by which the savings of
large numbers of people could be used in a
single enterprise.

In no sphere is there such such a total inversion
of ideas, in changing from an economics of want
to an economics of abundance, as in that of interest
on debts.

In the first place it would be completely
mistaken to suppose that there is any physical
basis for the so-called laws of interest, simple
and compound. The first law applies when the
interest is periodically paid, and the second when
it is not paid but accumulates, itself bearing
interest. These laws are in origin purely mathe-
matical. Certain assumptions are made and the
consequences quantitatively worked out. That
is all. What exactly these assumptions amount
to, beyond the agreement of one individual to
pay another so much a year interest for the use
of so much principal, it would puzzle anyone
to say. They are purely arbitrary and conven-
tional agreements without any necessary physical
justification at all. Such justification as is offered
for interest is usually a vague biological rather
than physical one, along the lines of the increment
accruing in agriculture, each seed bringing forth
thirty-, sixty-, or even a hundred-fold. But it is

DEBTS AND DEBT-REDEMPTION 177

perfectly open to anyone now to challenge the
theoretical basis of interest. In practice, however,
there is no reason why anyone should himself
abstain from consuming in order to lend to
another unless he derives some advantage from
it. However, as we have seen, unless individuals
wish to trust their grey-hairs to be supported
by the benevolence of governments, they are
bound to try to save in the hey-day of their
powers. Usually there are many similar reasons,
such as to provide for the better education of
their children when they are arriving at maturity,
and to insure against accidents, which are
sufficiently compelling, even without the induce-
ment of increment. The dawning realization of
this is responsible for many suggested reforms.
If Increment Looking Forward then Decrement
looking Backward. A correspondent, Basil
Paterson of Edinburgh, submitted to the author
during the writing of this book an interesting
suggestion that at least indicates how purely
arbitrary the conventional mathematical treat-
ment of interest really is. His argument rested
on some such consideration as this. Though it
be agreed to pay in one year's time, say, 5 for
the use of 100 lent now this is not the same as
agreeing to pay another 5 at the end of the
second year. Rather the value of the 100 at the
end of the first year has to be discounted to its
present value 95, now, so that the second
years' interest ought to be five per cent of 95 and

178 THE ROLE OF MONEY

so on. And who shall deny him ? It seems to
give the money-lender a little of his own medicine.
He works out that the consequence of this would
be to reduce the Compound Interest law to the
same as the present Simple Interest law. For
the latter, taking the above illustration, and
expressing the interest as a fraction instead of
a percentage, the successive yearly interest pay-
ments would be one twentieth, one twenty-first,
one twenty-second, one twenty-third, one twenty-
fourth, and so one, becoming one hundredth
or one per cent after eighty years. One of the
applications claimed is in the pawnbroking
business, where the least rate of interest profitable
becomes usurious if extended for any length of
time, and which the above method of estimation
would tend to correct.

Paterson's Interest Law Discounting the Principal.
It is of interest to apply the higher mathematics
to the foregoing idea, and consider, instead
of the increment accruing step by step by yearly
intervals, an infinite number of infinitesimal
periods, so as to make the process continuous
instead of being supposed to occur by yearly
steps. This does not affect the result that the
Compound Interest law is thus reduced to the
ordinary Simple Interest law, but we so arrive
at one very simple result for the law of simple
interest itself. Under these circumstances, as
the time is indefinitely increased without limit,
the total interest accruing becomes nearer and

DEBTS AND DEBT-REDEMPTION 179

nearer to the principal in amount and can never
exceed it however long the loan lasts. The
mathematical formula applying to this case is

iT=- 230-26 [lo glo (i-/)]
where i is the rate of interest per cent per annum,
T the time in years, and / the fraction of the
principal accruing as interest. From this and

TABLE OF SIMPLE INTEREST (NEW LAW) FOR 100 PRINCIPAL

Saving to Debtor

Years multiplied Total Interest (as compared
by rate % p. a. (New Law). with Old Law)

s. d. s. d.

1 19 ii i

2 i 19 7 5

3 2 19 i ii

4 3 18 5 17

5 4 17 6 26

6 5 16 6 36
8 7 13 9 63

10 9 10 4 9 8

15 13 18 7 ii 5

20 18 2 6 i 17 6

25 22 2 5 2 17 7

50 39 6 ii 10 13 i

100 63 4 5 36 15 7

184*14 86 2 10 100 o o

200 86 9 4 113 10 8

1000 99 19 ii 900 o i

a table of logarithms the new interest table can
readily be constructed. In the one above,
the interest accruing per 100 of principal is
shown in the middle column, the time in years
multiplied by the rate of interest per cent per
annum in the first column, and the saving to the
debtor by the new method of calculation in the
last column.

l8o THE ROLE OF MONEY

The above makes it clear that though for low rates
of interest and short periods there is little difference,
for high rates and long periods the difference is
enormous. The originator of the scheme pointed
out that its obvious objection is that it encourages
the investor to draw out and re-invest his money
every year, but that is completely impossible
with permanent long term and non-redeemable
loans such as the national debt. If applied to
these it would probably suffice instead of the
simple redemption scheme later referred to (p. 1 86).
An alternative way would be to continue the
interest payments at the ordinary rate, regarding
the difference (shown above in the last column)
as a sinking fund repayment. In this mode of
reckoning the payments would be made at uniform
rate as now for a limited time and then stop.
This time is given under this law as one hundred
and eighty-four and one-seventh years divided
by the rate of interest per cent per annum, as
indicated in the above table.

GeselVs Ideas of Making Money Itself Depreciate.
-A much more sweeping proposal is that of the
money reformer, Silvio Gesell, who would make
all money depreciate with time, say five per cent
per annum, or a penny in the pound per month.
It would only be maintained current as legal
tender by periodically stamping it like an insurance
card. If the public would stand this, and they
seem positively to love this sort of government
edict, it certainly would have some remarkable

DEBTS AND DEBT-REDEMPTION l8l

consequences. It is claimed that it would, as it
were, shift down the whole scale of interest by
five per cent bodily, in the sense that where now
we should have to pay four per cent for a loan, then
we should get one per cent for taking the money
off the owner's hands and saving him the five
per cent deterioration. If so, all borrowing for
government and municipal public works would
be done at a one per cent profit rather than at
a four per cent interest rate. The scheme is
actually being advocated by one British Chamber
of Commerce and is likely to prove exceedingly
popular in municipal, if not government, circles.
GeselPs original idea was to prevent anyone
hoarding money, to increase its " velocity of
circulation ", and compel people who had it to
spend it quickly. But the possibility at least of
this effect of changing the basis or datum-line
from which increment is reckoned, from zero to
a five per cent decrement, is worth independent
consideration, as all the other results would
equally well be secured if money were issued
nationally as described without making it rot or
depreciate.

Objections. The view taken in this book is
that money is a binding contract between the
owner who has given up for nothing, not even
for interest payment, the use of goods and services
to the community and in common justice he
ought to receive back just as much as he has
given up. Stamping the money with a five per

1 82 THE ROLE OF MONEY

cent per annum tax would bring in a revenue
to the community sinilar to what it would get
if, instead of a bank-rate of, say, five per cent on
the issue, the nation issued the money in exchange
for national debt securities destroyed, or in lieu
of this charged five per cent to the existing
borrowers instead of the banks. This is not to
deny that the nation could do both, that is to say,
itself take the profits of the issue now appropriated
by the banks and then charge a five per cent per
annum maintenance tax or stamp-duty to keep
the money current. But there really does seem
no justification at all for taxing the medium of
exchange, and though it may be difficult at first
sight to devise means for dodging the payment,
it certainly would create a powerful stimulus
to the inventive mind to try so to do. In this
respect it seems calculated to produce exactly
the opposite effect to what is intended. People
would try to refuse to accept it just as powerfully
as they would be constrained to spend it, and
although, admittedly, it might put them to some
trouble, the inducement to use money as little
as possible, and to enter into mutual understand-
ings to this end, would be as great as the induce-
ment to spend it as soon as they received it.
Whereas, on the plan here advocated, hoarding
simply would not matter, for it has the effect,
as has been shown, of postponing indefinitely
the payment of taxation, as more money would
be issued to make up for increase of hoarding

DEBTS AND DEBT-REDEMPTION 183

if it occurred. Also, instead of making money
still more of a hectic source of anxiety and hurry,
the plan here favoured would make credit money
an invaluable social device for freeing men from
artificial financial and attendant worries and the
inverted illusions about money fostered by the
present system.

The Possibility of Arbitrarily lowering Interest
Rates. The possibility, not to say desirability,
of shifting the datum-line from which increment
is reckoned to one below zero, so as to start with
an initial decrement, does not seem to be against,
but rather in keeping with, the, at bottom, purely
arbitrary character of interest in an age of
potential abundance. Quite broadly, as in the
day of scarcity, when the importance of increasing
production was paramount, the banking system
in effect shifted the datum-line from nothing to
five per cent or so above zero by issuing money
as a debt to themselves, now that the emphasis
is on increasing consumption there seems nothing
impracticable in devising means for lowering it
below zero, by putting a tax or impost upon being
in possession of it. In the one case, people owing
it had to pay five per cent per annum to bring it
into existence and, in the other, people owning
it have to pay five per cent per annum to prevent
it going out of existence !

The Probable Effect in Increasing Capital
Indebtedness. But one further comment on this
aspect of the Gesell scheme may be made.

184 THE ROLE OF MONEY

Although there seems no reason to doubt it
would now have some effect at least in lowering
the general rate of interest it is not so clear what
the relative effect would be as regards non-
productive indebtedness (either old debts or
new ones) and productive capital. At first sight
it would seem that it ought to lead to rapid
repayment of existing debts, so far as the terms
of the bond permitted, by purchase with existing
money to escape the tax, and their replacement
by non-interest bearing or even lightly taxed
debts. But, in the case of productive capital,
money is merely an intermediary, and productive
capital yields a revenue of real wealth which
cannot be so easily redistributed by taxation, as
the effect of so-called socialistic legislation of
the last half-century abundantly makes clear.
It would appear therefore that, the fund available
for investment being limited, astute people would
subscribe for productive enterprises rather than
towards non-productive expenditure, that is for
" industrials " rather than government and
municipal bonds. Although this should lead to
a lowering of the rate of interest on new money
invested in industry it would be at the expense
of a corresponding appreciation of the capital
values as regards existing indebtedness. As
regards the non-productive class of loans, if not
redeemable they should probably also appreciate
in exchange-value, and, to a lesser extent, if
redeemable. " O ! what a tangled web we weave

DEBTS AND DEBT-REDEMPTION 185

when first we practise to deceive." Is this really
the sort of monetary policy necessary in, or
worthy of, a great scientific age ?

Straightforward Debt Redemption by Taxation.
The author's plan for reducing the burden of
debt is quite straightforward. It is to earmark
the tax levied on what used to be termed
" unearned income ", or the part derived from
savings, for the purchase of the investment,
and the revenue from the part so acquired for
the same purpose. The effect of this is to make
all debts terminable by amortization. It is
convenient to express the time required for
complete amortization in units of time in which
the principal returns the interest. That is, the
unit of time is 100 divided by i, where i is the
rate of interest per cent per annum twenty
years for a five per cent, twenty-five years for
a four per cent investment, and so on. In these
units, the times for various rates of income-tax
are as follows :

Rate of Tax : 6/- $/- 4/- 3/- 2/- i/- in the pound.
Units of Time: 1-73 1-84 2-01 2-23 2-56 3-29

As an example, taking the 4$. in the pound rate
of tax, the time would be 40*2 years for an invest-
ment yielding five per cent and 50*25 years for
one yielding four per cent per annum. At this rate
of tax, about three-fourths of the redemption is
effected by interest payments on the part already
redeemed and only one-fourth by taxation.
In this way the productive capital wealth of

1 86 THE ROLE OF MONEY

the nation in the sense defined would automati-
cally become the property of the nation after
having returned to the owner interest varying
from 173 times the principal for a 6s. rate of
taxation to 3*29 times for a is. rate. It may be
called compound redemption, in that the interest
on the part already acquired is not used for
national expenditure but " saved " to purchase
the principal. For non-productive capital debts
of the nature of the national debt, for which
simple rather than compound redemption would
be more natural, the time required is of course
much longer, being, for half-redemption, about
seventy years for a 4$. tax-rate and a five per
cent investment. As the quantity of debt
unredeemed is reduced, the rate of redemption
is proportionately slower, so that, theoretically,
it is always approaching but never reaching
nothing. In the above illustration one per cent
would be unredeemed after four hundred and
sixty years. In many respects the suggestion of
Paterson already discussed is superior for the
amortization of this class of non-productive
permanent debt.

The Nationalization of Capital is National
" Saving ". The main advantages claimed for
the scheme are that it would be in accord with the
physical decrement of accumulated capital wealth,
and enable obsolete and obsolescent plant to
be kept up to date by private enterprise. But in
the future, when the existing debt was cleared

DEBTS AND DEBT-REDEMPTION 187

off, a revenue would accrue to the nation from
the ownership of the capital which could then
be used to furnish national dividends to the nation.
It need not be discussed here further except to
call attention to its novel feature as compared
with other so-called political nationalization
schemes, which in effect do not vest the owner-
ship of capital in the nation but merely redistribute
it among individual owners, merely multiplying
task-masters. This is because the nation is also
" saving " instead of just spending its revenue
from taxation.

It will be asked how the Chancellor of the
Exchequer is to provide for the National
Expenditure if so large a part of the taxes is taken
for Capital Redemption, and the answer is from
the sources now used to demoralize the community
by ameliorative legislation. Almost from the
moment the new monetary system was started,
unemployment would cease, except in so far as
the really unemployable were concerned, and
there would be a great progressive expansion
in the revenue of real wealth produced, with
corresponding increase in the total proceeds of
taxation if the rate remained unchanged. In
addition, instead of all the capital depreciating
with old age and new inventions and improve-
ments being blocked from application by the
accumulation of these colossal irrepayable debts,
the proceeds from the redemption would be
returned to the production system and be available

1 88 THE ROLE OF MONEY

for keeping the whole economic organization
up to date, replacing obsolescent and outworn
buildings and plant and employing the latest
and most time-saving methods of production. In
this the nation as the owner of an ever-increasing
part of the capital through the redemption
scheme would benefit no less than the individuals
who supplied it by abstinence from their own
consumption in the first instance.

CHAPTER VIII
THE PRACTICAL SITUATION

TS the New or the Old Economics upside Down ?
-* In this book the critical exposure has been
attempted of the chief errors of the past. A
civilization of truly unlimited promise has been
side-tracked from the broad highway of progress
and plunged into a morass of bottomless deceit
and evasion, in which it is now aimlessly flounder-
ing and struggling, and from which it is doubtful
whether it will ever again emerge. If it has been
necessary so much to reinforce the cold impersonal
language of science by the denunciation of
fraudulent practices, it is because delays are
dangerous and these practices ought by now to be
well-known to all men of good-will anxious to
avoid another holocaust.

We began our inquiries by asking the ordinary
man to reverse his natural way of looking upon
his own money and to consider how he got it
(it being nothing for something), rather than
its subsequent use to him, in which he merely
gets back what was given up for it. Once
men will think in that way then money itself
begins to appear as the opposite of what it is
supposed to be, which is the going without of
a vast collection of useful and valuable property

189

THE ROLE OF MONEY

by the community fully entitled to own it, and
which any individual is at liberty to own if desired,
though in fact only by getting another to take his
place in going without it.

At first, no doubt, all these ideas appear upside
down, a merely pedantic and wilful inversion of
the natural way of looking at the problem. But
it is safe to say that anyone who has ever really
started on this road and tried to follow it can never
go back. Nothing in the whole world can ever
look quite the same again. Is it the new view
that is upside down or the old ? Those queues
of hopeless and miserably nourished unemployed
which, if stretched out in single rank, shoulder
to shoulder, would line the motor-road from
Lands End to John o' Groats and be jammed
together to get them all in are they a sign of
poverty or wealth ? Those columns and columns
of stock-exchange securities that daily sprawl
over the pages of the morning newspapers
are they really evidence of national prosperity ?
The national debt alone, some 8,000 millions,
or 160 per man, woman, or child, bringing
in something like a million of interest every
day to someone, is it debt or wealth ? Every-
thing depends on the point of view. If we
would understand national economic problems
we must drop our conventional ideas altogether
and turn ourselves right round, just as we had to
do with money itself in order to see it in its true

light.

THE PRACTICAL SITUATION IQI

Abundance First, Apportionment Second. Then
again how utterly inverted appears the ordinary
mentality derived from the past age of scarcity
that there is only a limited amount of wealth in
the world and what anyone gets is at the expense
of someone else, and all the jealous bickering over
the share of the conflicting interests in the output,
rather than a common and loyal co-operation to
make the output larger, and provide and distribute
more with less work. As regards any one moment
of time it is, of course, true that there is only
so much available for distribution and no more,
but in the sense intended it is about as true as if
every shell fired in the War had been regarded
as one less left to fire, and totally untrue. Wealth
is a flow, not a store, and just as during the War
the output of munitions rose steadily the longer
the War lasted, so in peace the output of the things
consumed and used in living could, but for the
monetary stranglehold, be continuously increased
to any extent desired in reason. As it is, on the
average, probably not one person in five is doing
anything whatever to produce or assist others to
produce what is being consumed, and the whole
productive work is carried on by a small minority.
The rest of the gainfully-employed population is
either engaged in bargaining as to the price and
trying to sell the product to people with insufficient
money to buy, or actually deriving a livelihood by
obstructing and hindering production. So it is
in the international sphere ; fiscal entanglements

1 92 THE ROLE OF MONEY

of every kind are erected to prevent the smooth
exchange of the abundance of one nation with
that of another.

The Attitude of the Public Towards Cost.
If there is one sphere in which a change of heart
is called for, it is in the attitude of the public
towards costs, and their misguided passion for
cheapness. This attitude is of course induced by
the artificial scarcity of money, but what does it
end in ? Far more is being spent nowadays on
selling things than in making them. Although
everyone wants to be paid well for his work, and
price is nothing else but the sum total of the pay-
ments made from the moment production starts
until the sale is effected, as soon as people turn
from earning money to spending it, they all with
one accord want to beat down the price, and,
like the bankers, want to get something for nothing.
They finish up by paying on the average probably
twice as much as they need do and reduce their
own earnings to half as much as they might be,
three-quarters of the cost representing unnecessary
costs of commercial haggling and bargaining,
competitive sales organization, and advertising,
which do not contribute an iota to the value
received. The cost of distributing the product
ought, like the cost of producing it, to be exactly
known and to be brought down to the minimum
by efficient organization, not raised to the
maximum by wasteful and unnecessary
competition. Even more could be done to raise

THE PRACTICAL SITUATION 193

the general standard of living, and give all
a larger income and greater leisure, by deflecting
into production an increasing proportion of those
now engaged in distribution and selling, than by
the full and efficient employment of all existing
labour and capital. Hours of labour and rates
of wages and salary are purely traditional. The
eight-hour day which seemed so outrageous
a demand to the Victorian taskmasters is already
considered a maximum rather than a minimum.
Free the workers from the competition of backward
and less civilized workers by freeing the exchanges,
and provide money automatically sufficient to
distribute at the actual competitive price all the
goods and services the production system is
actually turning out, and the whole nation could
live on a much ampler scale and with far less
work than now. It is idle to give estimates which
are but guesses, though a five-fold increase of
income with much shorter working hours, as
quoted by some of the technocrats in America,
seems in Europe to be not unreasonably within
sight even of people now alive. But it is far better
to give people sufficient money resources to
cultivate their own personal lives and tastes
according to their own choice than to profession-
alize recreation, education, and culture and make
them a source of commercial profit.

Government Interference in Economics not
Helpful. There are many who may disagree
with the author's view that, if money were freed

194 THE ROLE OF MONEY

from its stranglehold on the creative functions
of society and restored to its proper place as
a distributory mechanism, and if, by amortization
or otherwise, the unlimited accumulation of
communal debt was prevented, and that already
accumulated reduced, there is not much wrong
with the productive economic system as such.
All sorts of fears will no doubt be entertained
as to the consequences, but in the author's opinion
none of the problems likely to arise will then be
difficult to deal with, as and if they occur. An
economic system is necessarily an equilibrium
condition integrating the actions of the individuals
comprising it, and the result cannot help being
an average of all the efforts exerted by the
individuals in providing most efficiently and least
wastefully for their own personal livelihood.
With a better physical understanding of the
national aspects, and of the conventions under-
lying the economics of individuals, less and less
interference from Government and more and
more intelligent direction from those within the
system itself, actively engaged in the work of
supplying and satisfying the economic needs
of the community, seem called for. If too many
people try to " save " the rate of interest will
fall and make it less advantageous to do so, and
if saving is insufficient to maintain and increase
the productive capital, the rate of interest will
rise to counteract the tendency. In an Age of
Plenty these matters can safely be left to adjust

THE PRACTICAL SITUATION 195

themselves, once the monetary and debt system
has been put into accord with physical reality.
It is the creation of money for speculative gambling
that distorts this truth.

A Progressive Evolution of Industry. This
is not to deny the need or importance of a
progressive evolution of industry from its present
bondage to ownership, and from the last vestige
of economic subservience or slavery. To this
end the plans of the Guild- Socialists are directed.
The bitter struggles of the past century will
not have been in vain if thereby they have
developed among the personnel and rank-and-file
of labour a loyalty and sense of responsibility
to themselves which they should be proud to
devote to the work of the whole community.
But these further advances all depend on a gradual
and orderly growth, which, in the first instance,
can only come about through a rising standard
of living. This is being held back and frustrated
by the perpetual strife and sabotage that have
marked the struggles of the past, and which are
primarily due to our utterly fraudulent monetary
system. The same could be said of all the ameliora-
tive social legishtion of the past century, which
merely tried to deal with and diminish the
suffering occasioned by the money system without
in one single instance intelligently striking at
the cause. But all these social and political
problems lie without the proper scope of this
book, the primary object of which has been to

196 THE ROLE OF MONEY

expound the legitimate role of money, to deal
faithfully with the existing system as it has grown
up, and to show how it is frustrating every effort
towards bringing about a saner and happier
state of things. Whatever further social changes
experience may dictate, no unbiassed inquirer
into the subject of money to-day can long escape
the conclusion that, until the system is drastically
transformed and its mistakes eliminated, there
can be no hope of peace, honesty, or stability
again in this world.

Monetary Reform First. However desirable
and necessary it may be to overhaul the political,
social, and economic machinery of the modern
State to allow scope and freedom for the new
possibilities of life introduced by modern scientific
progress to develop, the peculiar difficulties that
have attended this progress are not due in any
direct way to its obstruction by old habits
of thought but by the new and totally false id^as
concerning money. It is necessary in this respect
to return to the fundamental basis of money as
something no private person should be allowed
to create for himself. All, equally, should have
to give up for money the equivalent value in goods
and services before they can obtain it. What we
have now is not properly speaking a monetary
system at all, and money to-day, as something
always being created and destroyed by borrowing
and repayment, is a phenomenon new in history.
So also are all the familiar evils of the day new

THE PRACTICAL SITUATION 197

m history. They are all consequences of a false
money system. The continual growth of
unemployment is an example. The power of
employment is not given ultimately by possession
of money but by possession of the physical
necessities used and consumed by the worker
in the course of his employment. Instead of
these being only obtainable by people who have
themselves given up equivalent goods or services,
the nation's stock of its means of employment
is continually being depleted by defalcations
only different from the petty peculations of the
counterfeiter and forger of notes on account of
their universality and colossal extent. Modern
unemployment, like modern money, is a new
phenomenon. No person who really understands
the physical significance of what is going on in
the economic world to-day, through the arbitrary
private creation and destruction of money, can
feel any surprise whatever that the world has
been brought so nearly to disaster.

Even a schoolboy can understand the distinction
between lending to another, that is going without
oneself, and lending what belongs to someone
else, so avoiding having to go without oneself.
Economists still write as though the nation
existed for the sake of banks, the public being
adequately compensated by the banks not charging
their ordinary clients and customers for their
services in keeping their accounts. But surely
the banks are hardly the people to be trusted

198 THE ROLE OF MONEY

to advise as to the economic affairs of a great
commercial and industrial nation. The ordinary
man at least will appreciate the importance of
honesty in the monetary system, though he is
likely greatly to overestimate the difficulties in
the way of the nation getting it.

The Existing System on the Horns of a Dilemma.
By those fundamentally opposed to any reform,
which would stabilize the internal price-level
and prevent the incessant fluctuation in the value
of money out of which they derive their livelihood
by some form of peculation, the issue has so far
been represented as an alternative between fixing
the internal price-level or fixing the foreign
exchanges. The real truth is, rather, that these
interests want the banks to continue to be able
to create money, for their own and similar uses,
without having to bother about finding genuine
lenders. They want a certain predictable initial
rise of prices, with the exchanges fixed or pegged
to bring back the value again to par after prices
have been raised. They want the banks, who
provide them with money for nothing, to destroy
it after they have profited by the use of it. But if
the first were prevented, the question of the
exchanges would assume very much less
importance.

True, if banks are to continue to be at liberty
to raise the internal price-level by fictitious
loans and, if this is not periodically brought
down again by devious methods adopted to fix

THE PRACTICAL SITUATION 199

the exchanges, all our imports will cost us
proportionately more, just as the value of the home
money is debased, and our investments abroad
will thereby be proportionately reduced in value
both as regards principal and interest. The
opposite of course applies to the present time.
The monetary policies adopted to benefit the
rentier at home operate as much against foreign
as against home-debtors and are proving a
powerful disintegrating influence within the
Empire. This nation has only itself to blame
if its foreign debtors go bankrupt or find other
means of evading their artificially inflated burdens
altogether.

The common argument in favour of pegging
the exchanges is that the nation's food, which
it buys so largely from abroad with the interest
payment of past investments, will otherwise be
jeopardized. But as an argument against the nation
issuing its own money it is ludicrous. It is the
existing system which is perpetually on the horns
of a dilemma, and at its wits' end how to monkey
with the internal price-level without jeopardizing
foreign investments. Prevent the first and the
second will not occur.

The Economic Necessity of Frontiers. Never-
theless there will still remain very powerful
interests in favour of fixing the exchanges rather
than the internal price-level. They will have
thought it out this way. When the exchanges
are free, they go of course against the country

200 THE ROLE OF MONEY

in which goods are the dearer to produce and
in favour of those in which they are cheaper,
so preventing the markets of the former from being
subjected to the competition of the latter. The
money as it crosses the frontier then adjusts
itself automatically to the costs of living in the
new country. If they are lower there the money
loses in buying power and, if higher, it gains,
so that it is always able to buy much the same
wealth, whichever side of the frontier it is. But
on the ordinary financial and pecuniary principles
of the rentier and banker this appears wrong,
and it ought, they think, to be corrected by some
way of fixing the exchanges. It seems absurd
that a person in possession of a fixed monetary
income, crossing a frontier from where goods are
dear and the standard of living and wages high,
should be no better off than he was before he
emigrated to a country where goods are cheap
and the standard of living and wage-level are low.
The argument really amounts to this. That
a person who has saved in one country and has
a definite income should be able to transfer himself
to another country and spend his income where
he can get most for it that he should be able
to earn it in the highest and spend it in the lowest
market. Frontiers, which are a protection to
those who have to earn their living, are a hindrance
to those who do not. All the propaganda towards
the unification of the whole world in one brother-
hood, when they are all still at different stages

THE PRACTICAL SITUATION 2OI

of evolution and standards of living, though no
doubt arising from falsely idealistic religious
sentiment, is sedulously fostered by those who
do not have to earn their living, or, if they do,
wish to spend what they earn in another country.
The difference between leaving the exchanges
free and attempting to stabilize them is that,
while no impediment is offered to those who wish
to reside in a foreign country, there is no economic
advantage to be gained by it. Whereas if the
exchanges are fixed, then clearly it is quite
unnecessary to emigrate to get the advantage
in spending of a lower standard of living else-
where. It does not matter whether they are fixed
" automatically " by a gold-standard or, as appears
to have been also the case in the 1929 U.S.A.
slump, by arbitrary deflation, the standard of
wages and living in the more advanced countries
is thereby depressed to that of the standard
prevailing in the less advanced countries.

Free Exchanges Mean Free Trade. With free
foreign exchanges there would be no need of tariff
barriers or complicated fiscal agreements, the
nations would be free to trade for their mutual
benefit, and there would be no such thing as the
general standards of living in the more developed
being endangered by external competition with
the rest of the world. Genuine lending and
borrowing between nations would cease to
be a danger and become unobjectionable if
internal price-levels were fixed and the exchanges

2O2 THE ROLE OF MONEY

freed. In brief, the whole complicated fiscal
paraphernalia that now hinders goods from crossing
frontiers could disappear if the monies of different
countries were only able to exchange at their
respective purchasing powers each in its own
country, and if the arbitrary parity ratios
established when they were all convertible into
gold were abandoned once for all. The price-
level in any one country being fixed as described,
variations in the foreign exchanges would then be
almost entirely due to variations in the price-levels
abroad, and this, surely, is as it should be.

Compromise Hardly Feasible. Many influential
people, if only because they object to sudden
changes, will wish to compromise by continuing
the banking system with such modifications and
safeguards as the modern philosophy of money
can suggest. But it is not in the nature of science
to believe false accountancy to be a matter for
compromise. Some people must gain to others'
hurt, and the whole argument in favour of
compromise is really directed towards ascertaining
exactly how the injuries can best be concealed
from the knowledge of the unsuspecting victims.

Clearly the vital point on which no compromise
is possible is the aggregate quantity of money,
which ought always to be publicly known, as
was recognized for the ancient token money that
circulated in Athens and Sparta many centuries
before Christ. The power of increasing or
decreasing this aggregate quantity of money must

THE PRACTICAL SITUATION 203

be wrested from the banking system and vested
in the central control of the nation. Moreover,
the last people to trust in deciding whether the
issue should be increased or decreased are those
born and brought up in the jargon of the money-
market. All their cant phrases " speculative
boom ", " fictitious prosperity ", " over con-
fidence ", and the like, so glibly swallowed by
supposed impartial students of money in the past,
should be now universally recognized as the
polite way of informing the initiated that the
standard of living of the working class is rising
dangerously above subsistence level, and the
appropriate monkeying with the quantity of money
is being engineered to bring it down.

CHAPTER IX

HONESTY THE BEST MONETARY
POLICY

Signs of a New Truth. Our task would
not be complete if this book failed to convey
some hint at least to the mind of the reader of
the signs, at first often slight but cumulative
and interwoven, by which a scientific investigator
or pioneer into novel regions of thought knows
when he is on sure ground, even when everyone
else may think him mad. This is a philosophic
question of great interest, for, if we examine the
history of progress, the direction it has taken
appears so often a matter of intuition and
conviction, rather than to depend on anything
that at the time would have been accepted as
convincing or logical proof. Yet this is perhaps
an external or mass judgment of those who,
consciously or not, accept as proof subsequent
practical experience rather than fundamental
theoretical principles.

One, certainly, of these signs is how what
appears nothing so much as a jig-saw puzzle of
disconnected events and conundrums suddenly
seems to fit together into a picture, to be lost
again in a haze of uncertainty, but always return-
ing, each time a little more orderly and definite.

204

HONESTY THE BEST MONETARY POLICY 205

Something of this must have happened to many
who, once having started on the road of reversing
the conventional illusions, induced by the substitu-
tion of money for wealth, can never turn back
until they have restored concrete reality and
physical ideas everywhere to their rightful place,
and can never again hold the conventional and
impressionistic beliefs, still prevalent to-day
as to the cause and cure of the world's unrest.
There appears a satisfying correspondence between
the whole nature of the unsolved problem and
the dawning interpretation of it, such as that
not one of the maladies afflicting the relations of
men to-day are due to any real physical
insufficiency, such as characterized the earlier
epochs of history. They are due to the exact
opposite, " over-production, "" glut," competition
for markets, and the like, which renders the
continued existence of poverty and destitution
a physical absurdity. Where Mr. Baldwin asked
" What is the use of being able to make goods
if you cannot sell them ? " the new economist
would say at once " Why dhnnot we sell them ?
What is money for ? " and so cut at once the
Gordian knot of the whole tangle.

Another sign is the projection of the new view
back into the past, and how, there also, it throws
light upon what before was mysterious and
inexplicable. In this connection it is a gratifying
sign that many modern students of history are
beginning to realize the important part played

206 THE ROLE OF MONEY

by monetary causes in the changes of fortune and
direction that have overtaken nations. They are
now comprehending that these monetary causes
give a far truer interpretation of the real ferment
at work than the personalities and motives of those
who were apparently the principal actors in the
drama. In the history of the past century we have
had occasion to notice how the gold-standard has
been operating, and how it has been completely
unable to limit, as it was intended, the effect
of a false monetary system to each individual
country, but gradually extending and widening
the area of disturbance until it now embroils
the whole world.

Another sign of the power of a new and true
idea is its extension from its immediate application
to throw new light upon cognate problems. Thus
we have seen that the identical mistake which
explains the failure of the money system explains
also the old confusions in the political and
economic sphere concerning capital, and the
chronic struggle, as much now as ever in doubt
as to the issue, between what is termed capitalism
or individualism and socialism.

These then are some of the channels through
which a new idea makes its way into the general
mind in spite of its being in opposition to inherited
and stereotyped habits of thought, and it is the
significant glory of our age that owing to the
general quickening in the pace of life, to wider
and more liberal education, not only of the

HONESTY THE BEST MONETARY POLICY 2OJ

formal type, but in the very atmosphere a modern
citizen breathes, this period of incubation is
becoming incredibly shortened. So that, whereas
it took three or four generations, a century ago,
for anything new in thought to permeate the
general mind, to-day we see the whole process
going on before our eyes from year to year.
Once the fundamental fact is grasped that we are
living in an age distinguished only by its science
and by its understanding and control of the
physical realities of the external world, then,
surely, we must accept the corollary that anything
setting itself up against physical reality cannot
be allowed to continue. Any attempt to order
the world along a physically impassable road is
contrary to the motive power behind progress
and, if persisted in, can only bring disaster.
In brief, we live in a scientific age, the purpose
of which is frustrated by the survival of beliefs
in money, as the practical mechanism of distribu-
tion, which are the exact opposite of those which
have made that age possible. The symptoms
and repercussions are of infinite obscurity and
complexity, but the remedy is neither obscure
nor complex. It is as devastatingly simple and
effective as correcting an error of arithmetic.
Monetary Reform Begins at Home. The U.S.A.
Plan. Many people wish to make money reform
an international question, and have the vague
idea that money ought to be international. Some
of the interests in favour of this, those who wish

208 THE ROLE OF MONEY

to be able to earn on the highest and spend in
the lowest market, have just been referred to.
Others believe that until the international banker
is under control it is idle to attempt to deal with
the internal monetary system. Many think
President Roosevelt's policy is really directed
to a trial of strength with the international mone-
tary interests before dealing with those nearer
home. Whatever may be thought of it, it does
not seem as yet to contain a single clear principle
which, in the author's view, is essential to any
true permanent reform. The national expenditure
on economic reconstruction in America is on
a scale that will saddle the United States with
a permanent new debt, involving it in an increase
of taxation to the extent of something like an
additional 100 millions a year.

Now it is quite a mistake to imagine that there
is likely to be anything at all antagonistic to the
monetary interests in a policy designed to increase
national debt, for that, in the end, is the chief
object and purpose nowadays of war itself.
However it may be superficially criticized as
extravagant, it is right in the main line of least
resistance of the old system. The object of that
system is the increase of all the forms of national
debt. The acid test of reform is their redemption
or amortization out of the revenue. It all would
have been totally unnecessary, if the American
nation had taken the only sure step to ultimate
success from the first, instead of postponing

HONESTY THE BEST MONETARY POLICY 2OQ

it and perhaps never reaching it. The first step
is to deal with the issue of money itself. For
the power of both international and internal
banking alike depend on the ability to keep the
internal price-level always on the move. Put
that under statistical national control, by making
all money national and regulating the aggregate
amount issued, and free the foreign exchanges,
and a nation with an honest monetary system
has nothing to fear from the manipulation of
the price-level in other countries. But leave
the money at home dishonest and allow its
price-level to be varied by creating and
destroying it as required for speculators, and,
sooner or later, it will be made the certain
victim of external attack designed to reduce its
standard of living to the lowest prevailing else-
where.

In this respect the United States is certainly
stronger and better able to protect itself than the
older and more debt-ridden nations of Europe.
It may be, as all sensible men must hope, that
the courageous positive steps taken by the
President of the United States to defeat the
artificial paralysis of its economic system by the
banking system will leave him strong and respected
enough politically to do something likely to be
more permanently effective than anything he
has yet attempted, that he will be able, in fact,
to give the world a money system based on
physical reality. But this still appears to be very

2IO THE ROLE OF MONEY

much in doubt. If it is argued that speed was
the essence of the problem and that quick returns
were essential owing to the widespread acute
distress, it is just as quick to issue new money
correctly as incorrectly, when the principles
involved are understood. In any case, the nation
had had to assume provisional control over the
whole banking system, and under these circum-
stances, pending complete abolition of the private
issue of money, the amount in existence could
have been stabilized, and increased by national
issues. If this had been done by raising genuine
loans and putting them back into circulation by
issuing new money with corresponding remission
of taxes, the price-level would not have been
disturbed. On the other hand, if the object
were deliberately to raise prices, no one can
pretend there is any difficulty in doing that
the genuine loans would not to that extent have
been necessary. The situation from the first
moment would then have been absolutely under
national control.

Synopsis of the Principles of Reform.
However it is done there can be no question
what has to be done. Money is a debt which
cannot be repaid because there exists nothing
with which to repay it, and capital is a debt
that cannot be repaid because against it there
exists things of social use only, that can never
again be converted into what individuals require
and consume. With regard to the first, let it

HONESTY THE BEST MONETARY POLICY 211

be issued by and for the whole nation, as and when
goods appear on the market for use and con-
sumption without money and which cannot be
sold without forcing down prices. With regard
to the second, make all debts redeemable by
earmarking part of the revenue they yield for
amortization, and, for non-productive permanent
debts, calculating the yield to allow for the
discounting of the future value of the principal
to its value in the present as well as for the
increment of that value in the future. Let us
have, in the first, physical counters instead of
magical zeros below zero, and in the second, if
increments looking forwards also decrements
looking backwards.

As regards transition stages, fix a price index
on the cost of the more important expenses of
an average middle-class household, require the
banks always to keep pound for pound of national
money against their current accounts drawable
by cheque, set up a national advisory statistical
bureau on an independent scientific basis, and
reconstitute the mint for the issue of all money.
Avoid as the plague schemes for nationalizing
banks. The object is to stop private minting and
nationalize money itself, not to control legitimate
account-keeping or other financial institutions.
In future earmark, on the one hand, the proceeds
of the issue of money for the relief of the tax-
payer, and on the other the proceeds of taxation
on " unearned incomes " for the purchase for

212 THE ROLE OF MONEY

the nation of the capital from which they are
derived. These at least cover all that appears
fundamental and essential as regards the internal
reform of the system in the most straightforward
and open manner possible, and with the minimum
of interference with the nation's economic
organization.

Free the Exchanges. As regards its external
economic transactions,' both with other nations
and with the members of its own family, free
the exchanges and put them also under national
supervision. Let them find their own level and
not drag down nations to the level of the lowest.
Let us forget how many dollars in America,
francs in France, or marks in Germany used to
go to the pound under the gold-standard, and
make sure that just as many do go to the pound
as will buy the same in the country in question
as the pound does here. Reduce gold to
the rank of a commodity merely for convenient
international settlement and let it be bought and
sold like any other goods. Then there is no
advantage or disadvantage in the exchange of
one country's money for another that does not
at once correct itself by making it easier to settle
by goods rather than by exchanging money.
Then countries can only lend their own goods and
services and be repaid with those of their debtors.
Instead of being rivals and enemies in each others'
markets and setting up tariff barriers to protect
their own, and all alike the dupes of complicated

HONESTY THE BEST MONETARY POLICY 213

financial operations in which A lends what
B borrows and C supplies, nations will be
protected by their exchanges, and at long last
find peace.

Tall claims ? Aye ! but the half is not yet said.
Let but a single nation stand forth armed cap-a-
pie in the garment of honesty, and it can face
the world without fear of the chicaneries and
conspiracies that still serve for the monetary
systems of other countries. Roosevelt, it would
seem, does not believe it politically, but never-
theless it would appear to be scientifically true.
Reform begins at home. Let the League of Nations
look to this. To try and reform the whole world
without first dealing with the evil in our midst
may be a crusade but it is not practical politics.
But to gird on the sword and buckler of truth
would be to make the whole world our ally, though
all outside were still in the grip of the money-
power. As Major Douglas has wisely said, in
the same connection, you do not solve a problem
by making it larger.

The Real Universal Dictatorship No doubt
many will ridicule the idea that such a nursery
notion as honest counting is, in these days,
the key to problems which have baffled
for generations the collective wisdom of the
world's statesmen and advisers. But what does
the modern world owe to them ? It is a world
that has been created by just this type of honesty
and by the abolition of all pretended miracles, in

214 THE ROLE OF MONEY

the realm of physical realities, to the limbo of
superstition and magic.

It is a curious thought that the earliest descrip-
tion of the steam-engine in antiquity describes
its use for the magic opening of the temple doors,
when the priests lit the fires on the altars, to
deceive the populace into ascribing to a deity
what was the work of the engineer. In much the
same way to-day, the almost boundless fecundity
of the creative scientific discoveries and inventions
of the age are being appropriated for the purpose of
the mysterious opening of doors into the holy of
holies of the temples of mammon by a hierarchy
of imposters and humbugs, whom it is the first
task of a sane civilization to expose and clear out.

Let us have an end of the pretence that
economics should not be concerned with morals,
for the sort of morality that is in question is one
that economics takes as a matter of course, or
otherwise there could be no such thing as an
economic system at all. The public, if not the
economists, after the experience of the War and
post-War epoch, are now fully aware of the
insidious swindling to which the system of
creating and destroying money has lent itself
and it should insist on honest money as infinitely
more important than honest weights and measures.
The " credit-system ", which was held up to
reverence last century as a great advance in the
facilitation of trade and speculation, now appears
as a quite childish device for reckoning money

HONESTY THE BEST MONETARY POLICY 215

from an ever-varying datum-line below the zero,
useful no doubt at one time but now coming back
to roost.

Thousands of pounds worth of valuable
property, which took months to make, pass into
the possession of people, who have not contributed
a hand's turn to the making by a scratch in
a bank-ledger behind the doors of some bank-
manager's sanctum. Millions of hours of work
go into a shipment of goods, perhaps to the other
side of the world, and, hi ! presto, the exporter
is paid for them and given a permit to recoup
himself from the goods of his own nation before
those he has sold even leave port. Worse, when
the foreign goods do arrive to pay for them, the
money created disappears. So that under the
cabalistic abracadabra of " bills discounted ",
" acceptances ", " money at call and short-notice ",
the co-existence of nations is becoming an
impossibility, and they, too, must go, in order
that nothing may hinder the achievement of the
physically impossible, the counting below the
level where there is anything to count.

Let there be no mistake as to what is wrong.
It is not the bill of exchange in itself nor any of the
legitimate devices which the commercial world
have invented to facilitate international trade,
but all banking tricks that could not be performed
if the money were made of physical tokens or
counters, which cannot be made negative in
number. If this were so, then no one whatever,

2l6 THE ROLE OF MONEY

can get money without someone else giving it up,
except the State which issues the money in the
first instance. The acid test, like the remedy,
is really devastatingly simple, but that will not
stop it being opposed to the last ditch by the
bankers who, while making all sorts of ridiculous
claims that they are not continually creating and
destroying money by their methods, do not want
such claims put to this simple physical test.

Is it so absurd to suggest that the whole complex
of the world's madness could and would be cured
by replacing the banker by an honest adding
machine ? That sort of dictatorship already
exists universally in fact, whatever the pretence,
and the nation that first recognizes the truth
will not need to set up any other dictator within
its realm nor fear aggression or interference
from without.

Reculer Pour Mieux Sauter. Thus we have
traced the origin of the present-day social
and international unrest, and the frustration
of the beneficient scientific advances and
inventions which have put at the service of
man the primary forces of Nature, to one single
cause, to debts that from their nature can never
be repaid ! Two classes have been distinguished.
The first is the debt of goods and services given
up when money comes into existence, to replace
direct exchange by barter and bridge the time-
interval between production and ultimate use
or consumption. The second is the capital debt

HONESTY THE BEST MONETARY POLICY 2 17

of money given up by individuals, to provide
the community with the goods and services
required to build up the general productive
organization, which are consumed in producing
the plant and accessories requisite before the
initiation of production. These products are
of no use to the consumer and by their nature
can never be distributed to repay the creditors.

To allay the world's maladies every form of
trickery, evasion, and postponement has been
tried in vain and many others are proposed, but
one remedy remains overlooked, distinguished
by directness, simplicity, and effectiveness from
all the palliatives, the ameliorations, and the
compromises, the blind internecine and inter-
national antagonisms and conflicts and the weary
round of social and economic strife. It is the truth.
Honesty is the best policy, and in no connection
could the old adage possibly be more obvious
than in regard to money itself. Let us in this
respect, as the French say, reculer pour mieux
sauter. Let us not take a single step forward until
we have taken first one back.

Which is it Lawful to Create Wealth or Money ?
Our political, social, and juridical machinery
may be outworn and in need of changes of
thought and practice to give scope to the new
conditions and modes by which men derive their
livelihood. Our forms of human association may
be moribund, our belief in them shaken, and the
spirit of men in eclipse. But these are not causes

2l8 THE ROLE OF MONEY

but consequences. Who dare pretend that it
is outside the law and constitution of this or any
country to succeed in lightening the labour of
living and to enable men to live less like beasts ?
Or who dare say it is within the law to utter and
destroy money ?

The monetary system is not outworn or senile.
It is novel, upstart, and imperious, defeating
technological progress by turning it into the
channels of destruction, and challenging the
autonomy not of one nation but of all alike, so
that now the original authorities constituted for
the preservation of that autonomy needs must
fawn upon it to rule at all. Hampered by national
frontiers, nothing can satisfy it till the whole
world is made safe for banking, that its funda-
mental insolvency may defy exposure. Under
the specious guise of a unification of humanity,
it aims at absolute dictatorship under which none
shall be allowed to live save by its favour and for
the advancement of its transcendent whims.

The British Way. Let us not, as other countries
have done in the grip of these anti-social innova-
tions, discard a peculiarly native growth, the free-
dom of the individual and personal life, or be goaded
into paroxysms of futile despair under this new
absolutism. Let us see it for what it is, deriving
its power from the loan of licences to live, its
revenues from the tribute that all without
exception must pay it, and its irresistible sway
from the consequence, only now dawning on

HONESTY THE BEST MONETARY POLICY 2 19

a duped world that, its loans being fictitious,
its pawn-tickets can never afterwards be redeemed.
Let us go back where others have not dared to
move, and press forward where they have had
to go back. Let us not enslave men that pretenders
may rule, but take back our sovereign powers
over money in order that men may be free. It
is a road Britons have trod before.

The costly system of juridical machinery we
maintain to prevent such things happening did
not come into existence or grow in public esteem
as the hirelings of government, but because of
yore it was the bulwark of peoples against the
treachery of governments. Though lying for
hire be the primrose path to promotion, testing
the truth is still the end of law. Even as the
heralds of a new Armageddon are taking wing
let the truth be tested within or without the
law. To pretend to hear nothing, to know nothing,
the organs of public education drugged, the
strong in a trap and the wise in a fog is that too
one of the evils of science or the negation of it ?

Is the issue to be tested in the Courts or on
the hustings ? Is it necessary to have a majority
to restore a law that has not been revoked, to
stop counterfeiting because it has taken every-
body in ? Is it necessary to break the law to
vindicate the law, or trust to democratic organiza-
tions, always officered in advance by the very
interests they ostensibly oppose ? Is it possible
to compromise with a lie by inventing new ones

220 THE ROLE OF MONEY

to cover up the first ? Let us lift back our
monetary system on to the narrow gauge of
honesty as the first step to a leap forward on
the broad gauge of progress. It poisons the very
air men breathe, rots them for life or fattens
them for death, and imputes its curse to science.
The Real Antagonist. The monetary system is
actually based on the very error to the point
blank denial of which Western civilization owes
its greatness. It serves only the convenience of a
parasitic and upstart plutocracy practising a
worldly wisdom the exact opposite of that which
is the foundation of the age. It prefers the dark
in times when all men seek the light, and is
sowing the seeds of hatred and war in a world
weary to death of strife. It is poisoning the wells
of Western civilization, and science must turn
from the conquest of Nature to deal with a more
sinister antagonist, or lose all it has won.

ENVOI

Clear as crystal waters spring the founts of Truth.
As clear once sprang the science that unloosed
The stream of wealth now dammed an4 mounting up
To sweep away the age that shuns rebirth.

Virgin springs the fount again, a moment born
Unfouled by intercourse, a moment God
To forge the heart-beat of humanity
And bring belief to being whole and sound.

BIBLIOGRAPHY

1. Wealth, Virtual Wealth, and Debt. F. Soddy. (Allen and
Unwin.) 1926. New edition with addition, 1933. 6s.

This contains the original ideas of the Energy Theory of Wealth,
and the Virtual Wealth Theory of Money, adumbrated in Cartesian
Economics (Hendersons), 1922, and other pamphlets.

2. Money versus M an. F. Soddy. (Elkin Mathews and Marrot.)
1931* 3$- 6J.

A succinct account of the same.

Among books most nearly in line with the above points of view
may be mentioned :

3. The Principal Cause of Unemployment. Denis W. Maxwell.
(Williams and Norgate.) 1932. Js. 6d.

4. Promise to Pay. R. McNair Wilson. (Routledge and Sons.)
1934. 35. 6d.

(Both of these deal particularly with international trade, the latter
claiming, with justice, to make the issue intelligible to anyone over 16.)

Another recent book, dealing with the situation in various countries,
is :

5. The Breakdown of Money : An Historical Explanation. C.
Hollis. (Sheed and Ward.) 1934. 45. 6d.

For a moderate statement of the " Social Credit " proposals of
Major Douglas, containing a bibliography of the literature, see :

6. This Age of Plenty. C. Marshall Hattersley. (Sir Isaac
Pitman and Sons.) 1929.

The following are the first and last books by S. A. Reeve :

7. Cost of Competition. S. A. Reeve. (New York : McClure,
Phillips and Co.) 1906. Deals with the waste of effort in com-
petitive " Commercialism ".

8. The Natural Laws of Social Convulsion. S. A. Reeve. (New
York: Dutton and Co.) 1933. Gives the theory of Wars and
Revolution adopted in this book.

Silvio Gesell's System and Proposals will be found in :

9. The Natural Economic Order. Silvio Gesell, translated by
P. Pye from 6th German edition (Neo-Verlag, Berlin-Frahnau), 1929.

10. Free Money. J. Henry Biichi. (Search Publishing Co.)
I933- 5*.

11. Stamp Scrip. Irving Fisher. (Adelphi Co., New York.)
X 933' Describes the sudden spread of Gesell's money in the U.S.A.,
and intended as a practical guide to municipalities wishing to adopt
the new form of currency.

221

222 BIBLIOGRAPHY

For information as to Technocracy.

12. The A. B.C. of Technocracy. Frank Arkright. (Hamish
Hamilton.) 1933. is. 6d.

13. What is Technocracy? Allen Raymond. (McGraw Hill
Book Co.) 1933. 6s.

14. The Engineers and the Price System. Thor stein Veblen. 1921.
Reprinted Viking Press, New York, 1934. $1.50.

15. The Economy of Abundance.* Stewart Chase [Macmillan and
Co., New York]. 1934.

The frankest orthodox book on money (from the socialist stand-
point) is :

1 6. What Everybody wants to know about Money. G. D. H. Cole
and Eight Others. (Victor Gollancz, Ltd.) 1933. 55.

An excellent account of the early history of " banking " and the
consequences of the Government's attempts to regulate it is :

17. Industrial Justice through Banking Reform. Henry Meulen.
(R. J. James, Ltd.) 1917.

Two books about the present " Slump ":

18. Why the Crisis? Lord Melchett. (V. Gollancz, Ltd.)
1931. 35. 6d.

19. The Truth about the Slump. A. N. Field. P.O. Box 154,
Nelson, New Zealand. 1932. (Privately printed.)

Some of the numerous writings of Arthur Kitson, the doyen of
British Monetary Reformers, may be given :

20. A Scientific Solution of the Money Question. 1894.

21. A Corner in Gold. (P. S. King and Son.) 1904.

22. A Fraudulent Standard. (P. S. King and Son.) 1917.

23. Unemployment. The Cause and a Remedy. (Cecil Palmer.)
1921.

24. The Bankers? Conspiracy which started the World Crisis.
(Elliot Stock.) 1933. 25. 6d.

Lastly a recent study of the doctrines of the New Economics :

25. The Modern Idolatry. An Analysis of Usury and the
Pathology of Debt.* Jeffry Mark [Chatto and Windus]. 1934.

* Published since this book was written.